Technical Analysis for 21/10/2016
EUR / USD – Euro US Dollar
The ECB has knocked down the euro – such messages appeared in the media on the eve. The euro has really finished the day in the “red zone”, showing a decline by 0.4%. But is this the guilty of the European monetary regulator? In my opinion, no, it isn’t, because Mario Draghi said nothing unusual. The ECB President once again stressed that the low rates and QE would remain until March 2017 or longer if required. Also, it was pointed out at the growth of the inflation in the medium term. Media write us that investors are supposedly expected the minimization of QE since the December meeting, and since Draghi has denied this, the market has disappointed in the euro. Personally, I do not understand who expected the reduction in the stimulus package in December, when the inflation in the euro zone had reached the level of 0.4% y / y. for the first time over 22 months. Just now the ECB began to receive the first positive signals, which are still not enough to minimize QE. So why did the euro fall on Thursday? I tend not to the fall of the euro, but to the increase of the basket of the dollar index on the whole. USDX is experiencing a steady upward trend and the nearest strong resistance area is located at the level of 98.59, which implies the decline in the EUR / USD to the level of 1.0900. Why is the dollar index increasing? This is because the US Federal Reserve is the only central bank in the leading foursome that will raise interest rates this year. It is impossible to ignore the dynamics of the credit markets, where the yield on the 10-year government bonds has dropped significantly in relation to their counterparts in the US and the UK, which is negative for the euro.
GBP / USD – British Pound Dollar
At present, a mixed background is being formed. On the one hand, the positive dynamics of the debt market could support the British currency. On Thursday the yield on the 10-year UK government bonds increased significantly in relation to their counterparts from the United States and Germany, which increases the attractiveness of investments in British assets. Another positive factor is the reduction of cross-rate quotations EUR / GBP, which also supports the pound in the pair with the dollar. On the other hand, on the eve black gold finished trading in the “red zone”, losing more than 2% and today this dynamics can continue, which in turn will put pressure on the pound because of the strong historical correlation of two instruments. Why may oil continue to decline today? Are there two reasons for this? Firstly, the strengthening of the US dollar traditionally has a negative impact on energy costs. Secondly, on the eve Nigeria said that it would reduce its export prices for oil. Nigeria begins to dumping in order to attract customers and increase the country’s share at the market.
USD / JPY – US Dollar Japanese Yen
The corrective decline in this currency pair has been completed and now we can say with certainty about the continuation of an upward trend. Firstly, the trend on the US Dollar is gaining momentum. The yield differential on the 10-year US and Japanese bonds is expanding again, which increases the attractiveness of investing in the US assets. It is impossible to ignore the sell-off in commodity markets: on Thursday energy and metals finished the trade in the “red zone”, which positively affect the dollar quotations, because the cost of raw materials is denominated in the US currency. Secondly, on the eve futures of the Japanese stock index gained weight of 1.6%, going to a new high for the last 5.5 months. Taking into account the decline of the fear index Nikkei Volatility to the lowest level this year as well as the S & P 500 VIX index fall, the upward trend in the stock market will continue, that have the negative impact on the yen as a funding currency. Today, in the midst of the European trading session, the head of the Bank of Japan will give a speech. In my opinion, Kuroda can give hints to the possibility of further easing of the monetary policy at a meeting on 20 December if the inflation continues to remain in the negative area, which can also reassure the bulls to build-up long positions.