January 27, 2018

FXTM, What to expect from EURUSD for the Q1 2018 -Fundamentally and Technically-

Buoyed by Europe’s improving macro fundamentals.

This article is originally referred from FXTM Market Forecast Q1 2018.

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The Euro voyaged within a wide range against the Dollar during the final quarter of 2017 as investors tussled with the various market themes driving the currency pair.

Here is what’s happening in Eurozone

An unwelcome return of political uncertainty in Europe following Catalonia’s illegal independence referendum, swiftly dented investor attraction towards the Euro during early October.

Although the currency managed stay afloat during political uncertainty in Spain, this was short lived after German Chancellor Angela Merkel failed to form a new government in November.

With anxiety brewing ahead of the Italian General election this year, polls show the Eurosceptic party Five Star Movement (5S) gaining lead, this means the Euro could face some headwinds down the road.

While political risk has the ability to entice bears in the short term, Europe’s steadily improving macroeconomic landscape is likely to cushion the Euro’s downside losses.

It must be kept in mind that consumer confidence across the region is at its highest since 2001, while forward looking indicators such as Manufacturing PMI’s climbed to record highs.

Europe’s recovering economic landscape has allowed the European Central Bank to reduce its bond-buying program to €30 billion from €60 billion, starting in January, and this is likely to continue supporting the Euro moving forward.

EURUSD Weekly Price Chart
EURUSD Monthly Price Chart

And Here is what’s happening in the US

On the other side of the Atlantic, the Dollar looks to be heading into the first quarter of 2018 on the wrong side of confident.

It seems that the initial market excitement witnessed during early Q4 over US tax reforms have fizzled away, while concerns still remain elevated over stubbornly low levels of inflation in the States.

Although sentiment remains bullish towards the US economy amid the improving economic conditions, market players seem more concerned with tax reforms and rate hike expectations.

Although the Greenback was initially supported by the prospects of tax cuts being implemented, bulls may take a pause as investors investigate the cuts will lift growth materially in the longer run.

The Dollar remains at threat of depreciating further in 2018, if the impact of Trump’s $1.5 trillion tax overhaul fails to meet market expectations.

So What about “EUR vs USD”

As we head into the first quarter of 2018, the Euro is expected to strengthen modestly against the Dollar amid Europe’s improving macro fundamentals.

There is a suspicion that market speculation will mount over hawkish members of the ECB pushing harder for policy tightening this year, as the economic conditions strengthen further.

In the States, February marks the end of Yellen’s mandate and it will be interesting to see how the new Fed head, Jerome Powell, handles monetary policy moving forward.

A vulnerable Dollar is likely to continue supporting the EURUSD bulls, with a breakout above 1.2000 opening the gates to further upside. Despite the short end of the U.S. yield curve spiking higher on expectations of further interest rate hikes in 2018, the longer end remains pressured.

The US 10 year / 2 year treasury spread fell below 50 basis points for the first time since 2007, which remains a negative factor for the USD.

A rise in US 10 year treasury yields towards 3% or above will likely reverse some of the dollars losses, otherwise, the greenback is likely to remain under pressure.

Technical Analysis on EURUSD

Taking a look at the technical picture, the EURUSD is bullish on the daily and weekly charts as there have been consistently higher highs and higher lows.

A decisive breakout above the 1.2075 resistance level is likely to encourage a further incline higher towards 1.2200.

Technical traders will continue to observe how prices behave at the 1.2000 psychological resistance level on the weekly charts.

If the upside momentum holds and bulls are able to conquer 1.2200, then the EURUSD has the ability to venture towards the monthly 1.2440 resistance.

Alternatively, a failure for bulls to stay above 1.2000 could encourage a decline to 1.1950 and 1.1650, respectively.

Original Source: FXTM Market Forecast Q1 2018

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