Today’s US CPI print prompted a modest USD sell off, the DXY -0.10% since the New York open and EUR/USD rallied roughly +0.25% with gains on the day circa 0.45%. Below forecast US CPI gave the single currency a boost, +0.1% core CPI was the market driver with the all items index month on month +0.2% (rounded up from 0.174%) but y-on-y just 1.5% adding a little extra downward pressure on US Treasury yields and consequently the DXY.
With the ECB meeting behind us and the two key economic inputs for the Fed (US non-farm payrolls and CPI) released, there’s not much on the table until the Fed meets later this month (March 19 & 20). EUR/USD is knocking on the door of the 200-HMA at 1.1296, a key short term trend determinant and with the intermediate term driver the 21-DMA at 1.1312, it’s getting mighty congested.
Our proprietary moving average/ Bollinger Band model was 15 contracts short EUR/USD yesterday morning, cut back to -13 this morning and is closing the day -9, requiring a close above 1.1296 to flip the 200-HMA component long and a close above 1.1312 tomorrow to tip the blended model to +1 EUR/USD contract long.
The two short term models at this juncture are finely balanced, the 24-H to 120-H model +3, and the 200-HMA to 13-DMA model still short at a blended average of 1.1306. This tells us the EUR/USD move has been impressive since Friday morning’s 1.1176 low BUT it has more to do to shake out stubborn shorts. As we’ve noted before, when the model is maximum short it’s at its most vulnerable, and as we noted Thursday, 1.1180 represented the blended model’s oversold average for all 15 components.
As you can see above, the blended model’s oversold levels have nudged up to 1.1205 from Thursday’s 1.1180 mainly as a function of the short term M/As moving higher. The past few days have unwound the oversold condition at the short end and with spot close to 1.1300 we’re approaching overbought levels in the ultra short term model (1.1306-31), with individual components exhibiting a range of 1.1276-1.1378.
Until we break back above the 200-HMA (1.1296) the short term trend remains down. Until we break above the 21-DMA (1.1311) the intermediate trend remains down and until we break above the 55-DMA (1.1371) the medium term trend remains down. Our medium term model doesn’t reverse higher until 1.1370-85, that’s a Bollinger Band reading of +7.0 for the 24-HMA – unsustainable. For the 72-HMA that’s a Bollinger Band reading of +5.0, also unsustainable.
The 120-HMA B’Band reading would be +3.0, basically maximum stretch and also unsustainable, so the probabilities of a short term EUR/USD surge from current levels are lower than the likelihood of a reversion to the midpoint of the short term “normal” ranges circa 1.1250-1.1350. That being said, a slow but steady upward crawl could flip momentum models long, key points 1.1315, 1.1350, 70 and 85. If we attain the latter levels our blended model will be long and getting longer. However is there a fundamental argument to support such a move?
From our perspective the key is ultimately when convergence of monetary policy between the ECB and the Fed commences. From a US standpoint non-farm payrolls and CPI have exhibited cause for the Fed to remain “patient” but they haven’t provided sufficient divergence to cause the Fed to re-think policy.
Fed chairman Powell stated “Patient means that we don’t feel any hurry to change our interest rate policy. We’ve seen increasing evidence of the global economy slowing down, although our own economy has continued to perform well. Growth abroad, if it slows, can be a headwind for us. In addition, there are things like Brexit and slowing in China and Europe that can be headwinds.”
Mr. Powell has made it clear the Fed is data dependent and some pundits have interpreted that to mean the next Fed move will be a rate cut however the market has underestimated the Fed’s focus on rising inflationary pressures over the past three years which culminated in a series of fulfilled rate projections vs market forecasts to the contrary.
The Fed is data dependent and if the economy rebounds in Q2 as it has vs Q1 every year for the past several years, data dependency and rising wages could yet trigger a cautionary 25 bp hike in September or December. The ECB however have stated they’re on hold until March 2021 at the earliest, are pumping money into the system via LTROs (again) and remain committed to reinvesting bond maturities to keep credit markets liquid through a crowded European bank loan maturity calendar. The Fed on the other hand are still shrinking their balance sheet, albeit with hints at a pause in that policy later this year.
With the ECB’s deposit facility at -0.4% vs Fed Funds at +2.5% it’s hardly supportive of a strong EUR/USD exchange rate and given uncertainties over Brexit, the Hungarian political impasse, volatile Italian and French local political climates, all these conditions outweigh partisan US political finger pointing and bickering – we’ve dealt with Washington gridlock before and its had very little impact on the exchange rate.
The grounding of Boeing 737s due to the crash of a second jetliner has impacted EUR/USD spot trading adding additional downside to the DXY and upside to EUR/USD but it’s unlike;y to have more than an ephemeral effect. The probabilities are that Boeing’s stock sell off will eventually be seen as a buying opportunity, only Airbus could possibly fill the void for new orders and in the medium term could not meet demand for that many new orders.
From everything we’ve read, the US/China trade negotiations have become more amicable and have raised hopes for a successful conclusion. On the other hand Germany has suffered a decline in exports due to a slow down in Chinese demand plus Brexit uncertainty hampering EU companies’ medium term planning and hence capital spending. US 2019 GDP is expected to come in close to 2.5% whereas the ECB lowered their 2019 forecast for GDP to 1.1% and 2020 to just 1.6%. At this juncture, even a modest slip in US GDP would put it on point to outperform the Euro Area and unlikely to create the conditions required to warrant significant convergence in ECB monetary policy with the Fed.
After today’s US CPI data was released, pundits continued to focus on strong growth in wages (on a comparative basis) as a factor in sustaining CPI around the 2% level throughout 2019. As of yet no one is forecasting CPI to peak and decline or the dreaded “R” word. Data implies we may be hitting a “Goldilocks” period with CPI not too hot and not too cold, allowing the Fed to remain “patient” and US Treasury yields little changed, allowing equity markets to remain on a firmer footing.
If EUR/USD is going to rally hard, it will require an exogenous impetus which is hard to imagine given the state of geopolitics and dynamics in the US, Chinese and Euro Area economies. Our best guess is we stall ahead of key longer term EUR/USD moving averages circa 1.1370/85 in this current rebound and find it highly unlikely the long term M/As circa 1.1440/95 will cede.