5 Signs EUR/USD Parity is Still a Possibility

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5 Signs EUR/USD Parity is Still a Possibility

10:00 AM (EST) Update

It’s no secret that the EUR/USD pair has been correcting it’s downfalls on the forex dance floor, but what’s in store for the pair in a long run? I’m reaching out to the Invest Diva Diamond Analysis to analyze the scenario from different points; in this case, Greece, China and Fed rate hike play a part, and together with the technical chart analysis, give us 5 signals for the pair’s fate.

EUR/USD Daily: Ranges around Ichimoku cloud, triangle pattern and remains below key resistance

Economic Stuff

1- US Side:

As I covered in yesterday’s update,  we saw “some” improvements in the jobs report that one could argue may be good enough for the Fed to raise rates in September. At the very least, the July NFP results are enough to keep Fed tightening this year within the realm of possibility, according to some analysts. Data illustrating the continued strengthening of the labor market have increased the likelihood of a first interest rate hike in September. If the Fed were to act only on the basis of job creation, the probability of a September rate hike would be dominant. However, he added that several uncertainties remain, highlighting the “frustratingly slow” wage growth and the “fragility of the global economy” as potential factors that might convince Fed officials to wait a little longer.

A trading team at Goldman Sachs issued a note following last Friday’s US Non-Farm Payrolls report, where they outlined their reasoning behind a prediction that the pair will go to 1.02 within three months, and hit parity within six months.

GS reckons that US treasury bonds that have a shorter term to maturity, the so-called front end of the yield curve, will from now on attract a risk premium. This is related to the expectation that interest rates will rise at some stage in the US, and is a positive for the US dollar.

They also propose that the resumption of the collapse in oil prices, triggered by the deal to end sanctions against Iran, will increase deflationary pressures in both the Euro zone and Japan. This, in turn, will strengthen the incentive for both of those countries’ monetary authorities to accelerate monetary easing, or QE, a depressor of the value of their currencies, and a driver of the EUR/USD to the downside (and USD/JPY to the upside).

2- China’s Side

The rumor finally reached reality and China devalued its currency. As a result Ms. USA gained power against Chinese currency and other commodity currencies such as the Australian and New Zealand Dollars. People’s Bank of China(PBOC) to devalue the official reference rate for the Yuan by 1.9 percent, the most on record and way more than we were expecting.

The PBOC billed the move was a one-off realignment, saying the Yuan’s effective exchange rate had become “relatively strong” compared with market expectations. The gap “undermined the market benchmark status” of the reference rate, according to a spokesman for the central bank.

Beijing expects the devaluation to “help enhance the market orientation” of the reference rate, which it sees as part of the broader effort to increase Yuan flexibility. Officials also said they will expand FX trading hours to promote the establishment of a single on- and off-shore exchange rate.

Investors are suspicious that the devaluation was designed to boost exports after data released over the weekend showed overseas sales fell 8.3 percent in July, the most in four months. China had been supporting the Yuan to discourage capital outflows and promote the currency’s use on global markets, shrinking FX reserves by nearly $300 billion over the past 13 months in the process.

Thereafter the spotlight will shift to Fed-speak once again, with scheduled commentary from Bill Dudley, the President of the central bank’s New York branch, set to cross the wires. Traders will be keen to see if the influential FOMC member’s remarks support analysts’ bets on a rate hike in September. If they materialize, such comments may boost Ms. USA and therefore put an end to current EUR/USD rally.

3- Euro side:

There is not secret that Mr. Euro has been on the bullish side against his major dancing partners especially with today’s Greek agreement news. Greece and its lenders have agreed on the technical details of a third bailout, a spokesperson for the European Commission confirmed Tuesday, but a political agreement still needs to be secured. “Nothing is agreed until everything is agreed. We’ve had an agreement in principle,” said a spokesperson for Economic and Financial Affairs to CNBC.

But is this enough to save the EUR/USD from reaching parity? It appears that Ms. USA would gain way more strength than Mr. Euro in 6 months time, and could drag Mr. Euro kicking and screaming towards 13 year lows.

Technical Stuff

4- Short Term Outlook/ Market Sentiment

Mr. Euro has been ranging above and below the horizontal Ichimoku cloud since March 2015, inside a triangle chart pattern as he dances against Ms. USA on the forex dance floor. But the EUR/USD pair hasn’t been able to show a strong bullish reversal indication as it wasn’t able to break above the key resistance at 23% Fibonacci at 1.13 – 1.14 level. Summer days and tired Greek news could be behind the range but as any solid triangle pattern would suggest, this low volatility could only be the calm before the strom.

5- Long Term Outlook

The pair has clearly been consolidating on the monthly chart but has yet to complete the Saucer chart pattern. Keeping the fundamentals in mind, it could only be a matter of time when the pair reaches its parity fate, where it could go as low as the lows of 2002, below 1.00 and beyond.

Alternative Scenario:  Above 1.11 look for rallies towards 1.12 and 1.15.

Where I’m setting my stops and limits:

Support Levels Turning Point Resistance Levels
1.08 1.11 1.15
1.0450 1.13 1.17

*Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.