EUR/USD: A case for a move below parity - SocGen
Analysts at Societe Generale explain that the new US policy mix suggests that more Fed hikes have to be priced and with lasting policy uncertainty and protectionism fears, there are probably enough ingredients to consider the risk of massive new dollar appreciation.“If the negative political surprises don’t stop there and have a far more dramatic impact on Europe, the risk to our forecast is that the euro could fall much more.” “The trigger: under-priced risk of a more aggressive Fed. Donald’s Trump election could become very decisive for the medium-term dollar outlook. His inflationary programme (spending, tax cuts and deregulation) and the associated growth boost are a policy mix that could accelerate the Fed’s pace of tightening. The point is that inflation breakevens are spiking, while the market pricing of the Fed calendar remains very complacent.” “The recent price action is seriously challenging long-term patterns. The EUR/USD may have broken a major trend line in the 1.06-1.07 region, starting from the 2000-2001 lows and accurately capturing the three increasing bottoms of 2015-2016. These bottoms correspond to a horizontal triple top of the Dollar Index just above the psychological 100 level, above which there is an air pocket. This implies that a slightly lower euro would not break a two-year range but a 15-year trend and that the Dollar Index (the euro weighs 57.6%) would break free in the 100-120 region. The EUR/USD may therefore not stop at the recent 1.05 low but could break parity.” “Beyond dollar strength, scary euro risks.We have already called for lasting USD/JPY upside, and our central scenario sees the yen underperforming G3, with more USD/JPY bullish potential than EUR/USD bearishness. The BoJ caps Japanese yields, while the ECB tapering expected next year should support Bund yields. This would prevent yen appreciation while offering support to the euro. While a much lower EUR/USD is not our central scenario, the dollar breaking higher, combined with nasty political developments in Europe, could trigger a move below parity.The case for euro bearishness is tied to concerns that there will be further negative political surprises that could have a dramatic impact on Europe.”
GBP/USD heading back towards session low
The GBP/USD pair extended range-bounce trading action on Tuesday and is now headed towards the lower end of daily range. Currently trading with mild bearish bias, around 1.2270-65 band, the pair remained below 1.2300 handle and has failed to register any meaningful recovery, albeit has held above seven-week low touched last week amid holiday-thinned dull trading conditions. Growing prospects of stronger US economic growth, which would lead to higher interest rates, continues to underpin the greenback and has been the key factor restricting the pair's recovery. Later during NA session, the release of Conference Board's consumer confidence index for December might provide some impetus for short-term traders. However, the broader trend would remain dependent on the looming Brexit concerns and market expectations of Fed's monetary policy stance in 2017. On a sustained weakness below 1.2250 immediate support is likely to accelerate the slide towards 1.2220 support area below which the pair is likely to break through 1.2200 handle and head towards testing its next support near 1.2160-55 region. On the flip side, 1.2300 handle remains immediate strong hurdle, which if conquered might trigger short-covering bounce towards 1.2350 resistance, en-route 1.2390-1.2400 strong resistance.
USD/JPY steady above 117.00 mark ahead of US data
Having posted a session high just below 117.50 level, the USD/JPY pair lost its upside momentum but has managed to hold its neck above 117.00 handle.Currently trading around 117.30 region, the pair gained fresh traction on Tuesday after disappointing release of Japanese CPI figures for the month of December. Moreover, speculations of stronger US economic growth, and faster Fed rate-tightening cycle, continues to underpin the US currency and collaborating to the pair's bid tone on Tuesday. Meanwhile, a cautious trading action around European equity markets is extending some support to the traditional safe-haven assets, including the Japanese Yen, and has led to the pair's directionless price-action, within a narrow trading range below mid-117.00s. In holiday curtailed thin trading conditions, traders on Tuesday will focus on the Conference Board's consumer confidence index for December, due later during NA session, in order to grab some short-term trading opportunities.Immediate downside support remains near 117.10-117.00 zone below which the pair is likely to head towards testing 116.55 support area. Meanwhile on the upside, sustained momentum above 117.50 level is likely to boost the pair towards 117.90 resistance, which if cleared has the potential to lift the pair towards 118.20-25 resistance area.
EUR/GBP hits fresh session high at 0.8525
The EUR/GBP cross maintained its bid tone for the sixth consecutive session and is now heading back towards two-week high touched last week. Currently trading at a fresh session peak, around 0.8525 level, the cross initially dropped to 0.8500 handle but quickly regained traction amid renewed selling pressure around the British Pound, with the GBP/USD pair dropping back closer to session low. Moreover, extension of the EUR/USD pair's tepid recovery bounce, from 14-year lows, is further assisting the cross to build on to last week's strong recovery gains. Immediate resistance is pegged near 0.8545-50 (Dec. monthly highs) above which the cross is likely to aim towards 0.8578 resistance (Nov. 30 high), en-route 0.8600 round figure mark. On the downside, weakness back below 0.8500 psychological mark is likely to drag the cross back towards 0.8480-75 intermediate support ahead of its next major support near mid-0.8400s.
GBP/JPY reverses early gains, slides further below 144.00 handle
The GBP/JPY cross failed to hold onto its move back above 144.00 handle and has now dropped to session low, retreating nearly 60-pips from session peak.Currently trading around 143.65-70 band, the cross initially jumped to 144.20 level after disappointing release of Japanese CPI figures for the month of December. The up-move, however, turned short-lived and the cross ran through fresh offers amid renewed selling pressure around the British Pound. With UK markets closed on Tuesday, reemerging 'hard Brexit' worries could be the only factor attributed to the current leg of slide in the British Pound. The cross has even failed to extract any support from slightly upbeat sentiment surrounding European equity markets, with both French and German indices posting modest gains. A follow through selling pressure below 143.50 (Friday's low) is likely to accelerate the slide, even below 143.00 handle, towards the very important 200-day SMA support near 142.50 region. On the upside, momentum back above 144.00 handle might continue to face resistance near 144.20-25 region, which if cleared has the potential to lift the cross back towards 145.00 psychological mark.
Oil flat-lined around $53.15-20, downside remains supported
WTI crude oil traded higher on Tuesday and was seen attempting to build on to its move back above $53.00/barrel mark.Currently trading around $53.20-15 band, optimism surrounding oil output cut agreement between OPEC and non-OPEC members, in an effort to reduce global supply glut, has been the key factor underpinning the black gold. Last month OPEC cartel agreed to cut output by 1.2 million barrels per day, while non-OPEC producers will cut production by 558,000 barrels. Meanwhile, resurgent greenback buying interest was seen restricting further upside amid thin liquidity in the market. A stronger greenback tends to weigh on commodities priced in the US Dollar, including oil. Moreover, investors also preferred to wait and see if the agreement actually materialize, and contribute towards rebalancing the oil market, before adding on to their bullish bets. The agreement between OPEC and non-OPEC producers will come in force from January 2017.With many market participants away for year-end holidays, trading activity is likely to remain subdued ahead of the US weekly inventories report from the API and EIA.On the upside, $53.50-55 region seems to act as immediate resistance above which the commodity seems all set to surpass $54.00 round figure mark and head towards testing 17-month high resistance near $54.50 region touched on Dec. 12.Meanwhile on the downside, weakness below $53.00 handle is likely to drag the commodity back towards $52.50 intermediate support, en-route $52.10-52.00 strong horizontal support.
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