Head of FX Strategy
Summary: We have a potentially bullish reversal in place here for EURUSD and other euro pairs, awaiting further confirmation next week. Elsewhere, the broader USD status faces an interesting test next week as the USD finds itself on its back foot ahead of next Wednesday’s FOMC meeting.
A few highlighted charts ahead of next week’s action.
EURUSD – a reversal?
A very smart daily and likely weekly reversal for EURUSD if we close here around or north of 1.1100 (the intraday high so far today exactly at that 38.2% Fibo retracement. We discussed the drivers of the euro comeback in today’s FX Update. As for the technical situation, EURUSD has been a muddle for some time, but the local bullish reversal has tactical implications for further upside toward the next important area around 1.1200-50 if the price action sticks into early next week. A more robust signal for a structural shift higher in the outlook requires a strong pull into 1.1400.
EURCHF – also reversing?
The euro strength was broad and the long beleaguered EURCHF looks potentially primed for a stronger rebound from here as well if it can hold the post-ECB reaction. The 1.100 level is the next important psychological line in the sand for the pair in looking higher, although the 38.2% retracement coincides with an interesting prior chart point and local low around 1.1065.
EURSEK – a different story
EURSEK has looked heavy this week. Why does EURSEK behave so differently from EURUSD and EURCHF, for example? The short answer is that SEK tends to be positively risk-correlated and correlated with economic strength in its export markets, especially the rest of Europe. On that note, if the ECB is effectively done what it can at this after this week’s meeting and Draghi is right that “it is time for fiscal policy to take charge”, Sweden stands to gain from a switch to a fiscal focus. As for the technical focus, the bears saw an encouraging rejection of the spike attempt back higher after a very weak CPI print earlier this week, but the pair really needs to take out the 10.60 area to open up for the range toward 10.50-40. On the weekly EURSEK below, note the MACD rolling over and its divergence from the prior top. EURSEK an interesting one to track over the next few weeks for a possibly sea change in the trend.
AUDUSD weekly – still needs more to reverse the downtrend
AUDUSD has continued to dribble higher over the last couple of weeks on strong risk appetite and on the hopes that the US-China trade relationship is not beyond saving. The reversal has taken the price action up through the prior low, but the more important reversal signal doesn’t arrive until we have seen a rally through the important Fibo retracement levels like the 61.8% Fibo of the last sell-off wave around 0.6927 and even into 0.7000. A move of this magnitude (into 0.7000+) would suggest that the long standing and rather sluggish down-trend since early 2018 has been neutralized – until then, we’re in limbo.
AUDNZD – continuation late this week
After a period of shallow consolidation, AUDNZD is following through higher to close the week – entering territory it hasn’t seen in 10 months. The next major chart area really doesn’t come in until the 1.1175 area and even higher to 1.1300+, which has defined the range since 2014. To get toward the latter level might require a strong fundamental catalyst.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
