Trading under Divergent US Euro zone Sentiments

Trading under Divergent US Euro zone Sentiments

By: Darryl Frankfort | Where To Trade | On:22-10-2014 10:19
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Key Highlights

  • US CPI expected to Lower to 1.6%
  • Bullish USD expectationas persist
  • Bearish Euro zone economy

 

EURUSD 

In the past two weeks, we have been experiencing a bullish of reversal of the EURUSD pair from its bearish fall. The reversal has led the market commentator to speculate that the dollar has been over bought. Since bottoming out at the 1.25 major level, the EUR USD has corrected some 380 pips near the 1.29 level. This correction was also accompanied by high volatility in the financial markets and sentiments showing risk aversion.

We have been of the opinion that the risk off mode and the accompanying volatility that the market was displaying last week was a temporary. Our analysis found that the extremely bearish news streaming out of the Euro zone was the primary cause of the risk aversion. We have now fallen well back within the 1.27 level as the market looks for direction.

 

US CPI expected to ease to 1.6

Today from the US, we have the CPI report for September in our calendars. A bearish USD reading from the CPI will see us move back up to near the 1.29 levels.  A USD bullish reading will see us slide below the current levels. Taking into account last weeks soft advance retail sales readings, we are expecting that the inflation will have reduced. The Year on year CPI for September is expected to have reduced by 1.6% from the reading on August of 1.5%. Markets will be trading with this bearish sentiment through ought the trading day until the Actual release comes out.

 

Where To Trade - US CPI iflation Projected

 

Bullish USD speculations

Though the CPI reading will dominate almost all the USD trades for the rest of the week, it is important to keep it in perspective. The US economy has had a remarkably eventful year. The dollar has exhibited its strength against other major currencies and pushed well within its pre- 2008-2009 crises levels. July marked the beginning of a new era for the currencies markets where we have a reversal of the dominant sentiment between the two most traded currencies the USD and the EUR.

The Boston Fed Chair, Eric Rosengren has short down the rumors in Wall Street suggesting that the FED would delay its cessation of the QE program.  Rosengren intimated that he does not foresee that the economy would require another round of quantitative easing. Though he cautioned that we cannot rule out any scenario, including the continuation of the QE, he maintained his projections that the rate hikes would take place in 2015. Whether his rate predictions prove to be true or not, the winding up of the QE program will see the USD become stronger against the other currencies.

 

Where To Trade - US vs German Inflation rate

 

A Bearish Euro Outlook

On the other hand the Euro zone has been saturating the market with an ever grimmer outlook. On Monday, the German PPI registered a further reduction to -1.0 (negative 0.1) from a previous reading of -0.8 (negative 0.8). This adds to the mounting evidence that Europe’s powerhouses now slowing down. The German finance, Wolfgang Schäuble, minister acknowledged that there needs to be more investment spending within the Euro zone however he was more committed on balancing the budget and avoiding debt spending.

This comes in the ever declining inflation in the Euro zone and the ever broadening attempts by the ECB to stimulate growth. The ECB is reported to have started the purchase of short term French covered bonds. These easing measures are only likely to increase going forward.  Needless to say this is a very bearish outlook for the euro.

 

Where To Trade - US vs German PPI

 

Actionable trading insight

Looking at the divergent fundamental outlooks between the US and the Euro zone, it is clear that there will be plenty of trading opportunities ahead. A great approach is to maintain a bias consistent with the fundamental outlook. For instance when the CPI reading comes out, we should fade any bullish spike if the CPI is worse than expected.

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