Last week turned out to be disappointing for the AUD bulls, despite the gap up opening on Monday after the negotiations between the Chinese and US presidents. What are the reasons behind this slide?
When the euro will rise above 1.15 and higher?
The euro has climbed to 1.1445 (its highest level in more than a year) due to improving the Euro area economic environment and Draghi’s hawkish commentaries at the last-week central banking conference in Sintra. According to some analysts, this was the peak; all the positive events have already been priced in and that 1.15 resistance is “unbreakable”. Analyst Carl Hammer of Skandinaviska Enskilda Banken (SEB) has a different point of view, he expects the EUR to rise well above 1.15 once one of the following conditions is met:
- A fiscal collaboration within the Eurozone members should occur. That is, a banking union and a fiscal union will have to match the existing monetary union. Such a congruence should be announced no earlier than in May 2018. A fiscal union would mean a further stage in the European Union integration process; it would make the Eurozone more robust, more resilient to the spate of upcoming financial and economic crises;
- The economic convergence within the Eurozone countries should be achieved. The internal imbalances in the levels of economic development should be eliminated. The Eurozone officials try hard to rectify these imbalances ever since the outbreak of Eurozone crisis. So far, their efforts are still not repaid.
- The ECB becoming more hawkish not only in word by also in deeds. Meanwhile, the ECB officials believe that a monetary policy stimulus is still needed for the smooth economic recovery. Ewald Nowotny, a Governing Council member, has recently said that monetary policy should be normalized as soon as the economy allows. While inflation remains exceedingly volatile and most of the time subdued, the ECB will unlikely remove even a small degree of its monetary policy accommodation. The ECB’s policymakers admit though that sooner or later they will have to return towards a more neutral rate differential. And then, the euro will certainly spike above the 1.15 /1.20 levels much to ECB’s regret. Rapid euro appreciation would tighten financial conditions prematurely. That is something the ECB would like to occur, so it continues to accord truly great monetary stimuli instead of entering into the hawkish cycle.
One more condition we would like to add from our own part – the Fed moving away from monetary normalization and ceasing to raise rates. A non-provision of the long-awaited fiscal stimulus would also trim the USD potential for rising higher. The euro would certainly benefit from the USD weakness and finally break the resistances at 1.15/1.20.
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