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October 20, 2017

Trading the EURUSD Pair: An Expert’s Perspective

The EUR/USD currency pair is trading around the 1.183 level, on par with its 50-day moving average of 1.185, and significantly higher than its 200-day moving average of 1.119. This indicates that the EUR is generally appreciating relative to the USD. The reversal started in January 2017 when the EUR began rising sharply against the USD, maintaining that momentum throughout the year. In the final quarter of 2016, the EUR declined sharply from around 1.11 to the USD to 1.050 before reversing.

Wilkins Finance currency trading strategist, Martin Vandross believes that the proof of the pudding is evident in the US dollar index.

‘Currently, the DXY is trading around 93.06, perilously close to the 52-week low of 91.01. We have seen the US dollar index recording slight gains in September/October of just 1.29%, but the 3-month performance (-2.20%) and the year to date performance (-9.11%) are cause for concern. This is evident in the appreciation of the EUR, GBP, JPY and CHF relative to the greenback this year. With almost 10% lost against major currencies (EUR, GBP, CHF, SEK, JPY, and CAD) this year, not even a 25-basis point rate hike can save the USD in 2017. 
Indeed, the Fed is largely expected to raise interest rates on Wednesday, 13 December 2017 for the last time this year when the FOMC meets. That should raise the federal funds rate in the region of 1.25% – 1.50%. Increases to the FFR typically result in increased demand for the USD as currency traders sell Forex in favour of buying the greenback.’

What EU Factors Are Driving Demand for the EUR?

There are many reasons why the EUR is posting strong gains against competing currencies on the markets. Firstly, the performance of the USD is nothing to write home about. On Friday, 6 October, the nonfarm payrolls report surprised markets and led to a rally in the GBP and EUR. The biggest driver of EUR bullishness is the possibility of reducing quantitative easing (QE) in 2018. These asset purchases have been designed to facilitate enhanced velocity flow of money through the European economy, in an era of uncharacteristically low interest rates and inflation rates.

The economic theory is as follows, by providing a climate conducive to borrowing and spending, economic activity can increase, thereby raising inflation, wage growth and employment prospects. The EUR’s performance against the USD has been largely positive in 2017. Currency traders anticipate that the mid-1.16 level will be supportive, while the upper region of 1.18 will not be maintained. The current area of resistance for the EUR/USD pair is seen as 1.1825 – 1.1880. The EUR is the most heavily weighted currency in the DXY (US dollar index) at 57%. Therefore, we can expect any appreciation in the EUR/USD pair to adversely impact the DXY and perpetuate the ongoing trend. Likewise, any appreciation of the USD will reverse the DXY and the EUR/USD pair accordingly.

Current Trends with the EURUSD Pair

Recent economic data releases in the US have been rather lacklustre. However, the performance of the US economy has not dampened the Fed’s appetite for raising interest rates in December. Inflation only ticked up 0.1% in September, and retail sales growth also slowed. However, October figures for the MCSI (Michigan Consumer Sentiment Index) indicated a level of 101.1 – a 13-year high.

But, modest weakness in the EUR/USD pair is largely the result of EUR weakness and not USD strength. It was none other than ECB president, Mario Draghi who indicated a willingness to keep interest rates at their historic lows well beyond the end of QE. This sent the EUR on a downward trajectory, following the independence initiatives in Catalonia. Brexit fears notwithstanding, the solidarity of the Eurozone is being tested from many sides.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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