Why the heck is EUR/USD Rallying?! 5 Likely Factors.
The forex party dancing members have been shakin' it like there is no tomorrow on the low-key August days that you'd normally expect low volatility. While many forex pairs shook it hard within the ranges we had previously covered (namely, NZD/USD and AUD/USD) some pairs took it to the extreme, tempting us to call out for the forex party security guards to make them keep it quite!
The EUR/USD pair is one of those naughty pairs. The sharp rally continues well into Monday creating 4 solid and strong bullish candlesticks on the daily forex dance floor break above key resistance levels. And these all happen despite the long-term bearish outlook on the pair.
So what the heck happened? Here are 5 factors that may have contributed to the odd EUR/USD behavior:
1- US Dollar Sell Off
After the FOMC dropped the bomb of not raising rates in September, the rate hike in December also became less likely, turning many passionate dollar bulls into grumpy bears.
The US economy was printing disappointing numbers even before the minutes were released, and we had already started seeing a shift in the forex market sentiment among the majors including the NZD/USD. The US building permits came in negative at 1.12M versus the 1.23M expected and on Tuesday. Consumer Price Index (CPI) also came in lower than expected at 0.1%, a disappointment comparing to last month's printing of 0.3%.
Then came the FOMC minutes revealed the majority of the committee members assessed that economic conditions weren’t ripe for a liftoff just yet, especially since downside risks to inflation are still present. When it comes to the labor market, Fed officials acknowledged that the U.S. economy is making good progress in moving closer to maximum employment. In particular, they cited increases in payroll gains and job openings, as well as declines in the unemployment rate and broader measures of labor underutilization. However, many also highlighted the slow pace of growth in wages, as this suggests that there’s some slack left to be absorbed and that there’s still room for improvement.
To sum it up, the July FOMC minutes revealed that Fed officials are pleased with the progress in the U.S. economy but would like to see the numbers reaching goals.
With this, the investors started to lose faith in Ms. USA's strength and pushed her down the edge... However her down moves were not as severe in commodity currencies such as Mr. Aussie or Mr. Kiwi, as the AUD/USD and NZD/USD have been falling. So Ms. USA single handedly is NOT the reason why EUR/USD is shooting up like a rocket. Then what is? Here are the next, more important factors.
2- Concerns over China
Perhaps the biggest culprit in the global market downturn these days is China, which is still struggling to shore up its equities, export activity, and overall economic performance. Recall that the Chinese government and the central bank have taken turns responding to desperate times and calling for desperate measures, ranging from stock market stimulus to yuan devaluation, in order to keep domestic demand afloat.
Despite all that, China has printed one dismal economic report after another, with Friday’s Caixin flash manufacturing PMI release putting the nail in the coffin thanks to its decline from 47.8 to 47.1 in August. That marks its sixth month below the 50.0 mark and its lowest reading since March 2009.
Since China is the world’s second largest economy and is the top buyer of products from most developed nations, what happens in China doesn’t stay in China, and it had an impact on the already weakening US dollar, which in turn could have turned the investors into buying the Euro. But is that all?
3- The Unwind of Carry Trades
Mr. Euro arguably should have fallen in the past several days; news of fresh Greek elections and a sharp sell-off in European equities would most often lead to a rush to the exits from the Euro currency. Whereas we would most often see Ms. USA rally in times of market turbulence as a traditional store of value, some TV news went as far as to suggest that the Euro rallied as a “safehaven” versus the US Dollar.
As Mr. Euro became a viable funding currency with negative rates and a wide-ranging QE program, it became a favorite of traders looking to try to trap the carry. For an economy like the United States, that was looking at US Dollar strength on the back of expected rate hikes, the short EUR/USD trade made a lot of sense. There was a clear divergence in monetary policy, and that was likely to continue for at least the next year.
But with a September rate hike, and perhaps even a December hike looking even less likely; we’ve seen the short EUR/USD theme continuing to unwind. As clear evidence of risk-aversion, look to the 10-year yield in the United States which is now approaching 2%.
4- Europe Racing to do Business with Iran
As the sanctions are beginning top lift from one of the most talked about countries in the Middle East, European countries are among the first to in line waiting for the sanctions to be lifted to get the ball rolling. Even though the US is highly likely to lift the sanctions as well, the important factor to remember is that the U.S. (even if passing the congress) will ONLY be lifting nuclear related sanctions where as the Europe will reenter the Iranian marketplace; Heck many companies have already started the transactions.
As a country with massive business needs who happens to have oil money to spend, Iran could have a huge positive impact on the Euro zone, especially since the US won't be there to compete. From basic technology to pollution, energy saving material, fashion and more, Iran can open doors to many new business avenues in the region.This could score many economic points in the Euro and therefor lifting up Mr. Euro high and up, while Ms. USA doesn't seem to have such opportunities in the near future
5- Low Liquidity in Summer
With fewer market participants making trades, even smaller-than-usual positions could push prices around. Therefore, many traders are quick to blame the low liquidity during the summer months as the main factor that spurred volatility.
With that, notions of market fear and panic can quickly spread among traders and lead to magnified moves once investors rush to liquidate their positions. There aren’t a lot of top-tier economic catalysts lined up for this week, which suggests that market sentiment could continue to in the next few days. But as we have learned in the Invest Diva University, what goes up must come down... So even though the pair has broken key resistance levels, could we see the bearish movement coming back to the EUR/USD pair?
In a wild move, the pair broke above the Ichimoku cloud as well as the 23% Fibonacci level. Will the pair be bold enough to reach the next fibonacci retracement levels at 1.18 and 1.22? we may see a pullback before that happens.
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