A Q1 2017 Outlook for EURUSD: FX Charts

As a longer term view of the direction of the Eur/Usd, I think that this week is likely to be pretty much a “wait and see” affair, with liquidity probably remaining quite thin as traders are unlikely to want to become too involved ahead of the US jobs data, due on Friday (exp 4.7%, +175K).

Beyond that, looking into the first quarter of 2017, the theme of selling into Euro strength seems likely to prevail. The Italian banking crisis is likely to continue and it is not just Italy that could be in trouble. Traders are currently focusing on the recapitalisation process at Monte dei Paschi, but even Deutsche Bank has not escaped scrutiny and could be set to face further issues down the track.

The US$ actually seems set to outperform on most fronts, and not just against the Euro. With the Fed projecting 3 rate hikes in 2017, citing the fact that inflation expectations have increased “considerably”, while also suggesting that the labor market is tightening, the dollar does look to remain underpinned. At the same time, the EU growth outlook is much more subdued. The ECB decided to extend its quantitative easing (QE) program by nine months at its December meeting, although at a reduced rate of monthly asset purchases. The move was designed to shore up price pressures and avoid tightening financial conditions while economic momentum remains modest, at best.

Aside from the macro – economic outlook we have the “Trump” factor to consider and who knows what that will mean? We will discover more after his inauguration on Jan 20, but if he does as he has hinted – to reduce taxes and invest in infrastructure, amounting to a substantial fiscal stimulus – analysts suggest that we could be in for a considerable boost to US economic growth, bringing higher interest rates and inflation, as well as a new set of potential risks, including international trade wars. We shall have to wait and see how it all plays out on that side of the pond.

Meanwhile, back in the EU, aside from the banking crisis the 2017 focus will be on elections. We have elections, of varying importance, in each of:
Holland (General Election) (15 Mar)
Serbia (Presidential) (9 April)
France (Presidential) (Round 1: 23 April; Runoff/Final result: 7 May)
UK (Local) (4 May)
Norway (Parliamentary) (Sept 11)
Germany ( Presidential) (Latest possible date: 22 Oct)
Czech Republic (Legislative) (Oct)
Slovenia (Presidential) (Dec)
Hungary (Presidential) (Not yet announced)
Portugal (Local) (Not yet announced)
Slovenia (Presidential) (Dec).

On top of all that, Italy is never more than a few months away from the next election and could well see another one in 2017, although the incumbent, Paolo Gentiloni, has only been in office since December 11 following the “No” vote in the recent constitutional referendum. Even so, the next Italian general election is due to be held no later than 23 May 2018. Plenty of room for a crisis before then!

In the current environment a swing to the “extremist” parties is quite possible, and if Donald Trump does a half-decent job in his first few months of office it could well encourage voters in the EU to go with the more populist parties as they look for an alternative to the “old guard”, who will take much of the blame for the predicament that the EU finds itself in.
This could influence the Q1 elections of France (23 April) and Holland (15 March) in particular, and could eventually lead to deeper cracks within the EU itself. Angela Merkel will also not have an easy ride in Germany, although the election there is not due until September/ October

From a technical perspective, the longer time-frame charts do not look all that healthy for the Euro.

The longer term momentum indicators hint at lower levels ahead and therefore, selling into rallies still appears to be the plan. The weeklies are pointing south and the monthlies, while not looking quite so negative, still seem to suggest that the Euro is going to have a tough time of it in 2017.
We are going to see the odd bounce, and selling between 1.0650/1.0700 would seem to be the plan for the position takers, although we should actually leave some room for a possible bounce to the December high of 1.0873.

Targets? Well, the current trend low is at 1.0351. Under there, decent Fibo support lies at 1.0058 (76.4% of 0.8225/1.6019), below which it will be a pretty quick rush to 1.0000. Further out, as seen in the monthly chart below, I have a “head and shoulder” target at around 0.7870, which would be an all time low. I would be very doubtful of seeing that in 2017, but if France votes for the Far-Right in the April election, it could be where we are heading as the break-up of the EU/Euro, becomes more of a possibility.

If you wish to comment or have an alternative view, go to http://fxcharts.net/forums/topic/q1-2017-outlook-eurusd/

By | January 3, 2017

Leave a Reply