The Euro has rallied and corrected its oversold condition but the rally in our view is a sell. The big fundamentals are bearish the EUR and we expect a major sell-off to the downside. Our updated Forecast for EUR/USD below.
The market is very hawkish in terms of interest rate rises in Eurozone. In terms of ECB rate expectations markets are now pricing in a deposit rate at 1.0% in December but is this realistic?
We don’t think so – the hit on the eurozone economy from the Ukraine Russia conflict is big, with energy and food costs soaring.
Furthermore, China is a major export market for eurozone particularly Germany, and the Chinese economy is slowing up and this will weigh on EU economic growth.
We think the ECB will be cautious in terms of rate rises going forward and will prioritize growth over inflation. While we believe that markets are pricing in too much tightening by the ECB going forward they are probably underpricing Fed rate hikes.
Economic Growth and Monetary Policy
Economic growth in the US is currently running at more than double that of Euro zone and the USD already holds an interest rate advantage which looks set to increase further in the months ahead.
Finally, if we see risk-off accelerate this will strengthen the USD on its safe-haven status. The big trend is down in the Euro and we view the rally as a selling opportunity.
We see the big fundamentals as bearish for the Euro but large speculative hedge funds have a positive view.
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Sentiment
Large speculative funds have been long of the euro for most of the decline that started at 1.1500 and we now expect them to turn to selling the euro and send the euro far lower.
The fact that the euro has managed to go down with large speculators holding a long bias actually strengthens our bearish view.
Technical Analysis
On the chart below we have seen EUR/USD correct its oversold condition and we are now at the 20-day moving average and 1.0600 level which should in our view hold the rally.
The big trend is down and we think it has a long way to run down to big monthly support at the 1.000 level.
The bounce looks an excellent low-risk high reward shorting opportunity – stop should be back behind the big 1.0600 level.
