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Thursday, August 25, 2011

EURUSD currency pair on the brink

Despite some expectations EURUSD currency pair remained relatively stable during the recent market turmoils. As the equities and commodities were drown, one should expect the US Dollar to gain strength as it has almost always did in history. Instead the pair remained range bound.

Let's look at the graphs. You may click on them for a bigger version.

EURUSD Monthly Chart

EURUSD Weekly Chart

On the monthly graph we can see the long term trend hasn't changed. The Euro is still in an upward mode against USD. The bullish divergence seen between the MACD indicator and the currency value seems still valid. Usually the pair has to go above its previous high which hasn't happened till now. The Moving Averages are still pointing upward and MACD is on a positive side.

When will the pair break out of the range seems to be the question now.
Maybe tomorrow's speech of Bernanke would give us a key. Or maybe not. We'll wait and see.

Another factor which could trigger the movement is an improvement in the situation in Europe in the form of more political will to cooperate and occurrence of structural changes like common fiscal policies.

What is interesting is that on the weekly graph (graph below) is seen a clear triangle formation. This could signal a continuation of the previous trend and is in line with the bigger time-frame graph.

Anyway, given this breakout occurs in the next months we could see a value of at least 1.53 for EURUSD pair.

A movement in the pair would be a signal for commodities (mostly crude) to rise again on the hopes of improving economies as such a scenario most probably would be accompanied by stronger equities.

==Update Aug 26, 2011==

Some important events took place today.

Date (GMT) Country Event Actual Cons. Previous
Aug 26 08:00 EMU M3 Money Supply (3m) 2.1% 2.3% 2.0%
Aug 26 08:00 EMU M3 Money Supply (YoY) 2.0% 2.2% 2.1%
Aug 26 08:30 UK Gross Domestic Product (QoQ) 0.2%
Aug 26 08:30 UK Gross Domestic Product (YoY) 0.7%
Aug 26 08:30 UK Index of Services (3M/3M) 0.5% 0.6% 1.2%
Aug 26 12:30 US Gross Domestic Product Annualized 1.0% 1.1% 0.4%
Aug 26 12:30 US Gross Domestic Purchases Price Index 3.3% 2.3% 3.9%
Aug 26 12:30 US Real Personal Consumption Expenditures (QoQ) 2.2% 0.2% 2.1%
Aug 26 13:55 US Reuters/Michigan Consumer Sentiment Index 55.7 56.3 63.7

M3 money supply in European Monetary Union (EMU) decreased a bit on annual basis which would mean the probability of higher inflation in EU is getting smaller. Hence the pressure on ECB to lift interest rates in order to fight any higher inflation decreases.

In the same time in US the Gross Domestic Purchase Price Index (GDPPI) is lower than previous reading although still far above the consensus. The inflationary pressure in US is getting weaker but not as fast as economists expected. Looking at that index the FED could rest assured its promise to keep the rates low does not induce higher inflation. For now.

Reuters/Michigan index value could signal a further decline in consumer spending. It however does not measure the real money spent. An expectations sometimes differ than reality.

On a quarterly basis the Real Consumer Expenditures grew and the current reading is far above the consensus.What this could signal is a widening gap between consumers' expectations and their real spending. Their spending might be more not because they are willing to spend more but just because prices got higher. Which gets us back to the GDPPI which does not fall as much as economists expect.

If inflation kicks in the consumers will have to spend more no matter if they are expecting it or no.

Bernanke's speech didn't reveal anything new in particular which itself is an interesting hint. FED's chairman continues to believe the markets impact economy and not that markets reflect economy in advance. Like he said they are actually on a stand-by.

FOREX markets reacted as sending down the Frank (CHF) both against US Dollar and the Euro (more than 2%). The one currency that has moved steadily up during the current crisis. Till a couple of weeks ago. At first after Bernanke's speech both currencies appreciated against the Frank. At the end of day only the Euro continued to advance. What is interesting is that it advances against the US Dollar also. Is the Euro breaking out of the triangle in line?...

US stocks indexes advance a bit for the day also. Do the market participants bet on higher inflation?

If markets continue in this direction Bernanke's waiting would come to be justified. Even if he'd did it for different reasons.