By IFCMarkets
On Friday, weak GDP data came out in the United States. In the second quarter of 2016, its growth was only 1,2%, which is far less than expected +2,5%. In this regard, the decline of the US dollar index exceeded 1%. EURUSD pair rose for the 3rd straight day. Will the strengthening of the euro against the US dollar continue? Besides the GDP, we deem that the difference in current account balances of the two countries can also contribute to the strengthening.
The main reason for the weak US GDP growth in the second quarter of 2016 was the reduction of investments in business inventories for the first time in the last 5 years. Note that the GDP growth in the first quarter was revised down from +1,1% to +0,8%. This macroeconomic negative factor was partially offset by the growth in consumer spending in the second quarter by 4,2%, which is the maximum growth from the 4th quarter of 2014. Consumer spending represents two thirds of the US GDP. We deem that more active economic growth in the Eurozone may contribute to the strengthening of the euro against the US dollar.
According to the results of the second quarter it was +1,7%, which is bigger than the analogous US indicator. The significant negative balance of the US current account might also be s significant negative for the US dollar. In the first quarter of 2016 it was -$124,7 billion: the biggest from the 4th quarter of 2014. It is approximately 2.7% of the US GDP. The balance of the Eurozone current account is stable positive from August, 2011. In April of the current year, it recorded a new historical high and was +36.4 billion euros, and for the 1st quarter of the current year – approximately +90 billion euros.
Lately, the US currency rate stabilization has been achieved due to market participants’ expectations that the Fed rate hike is likely to happen soon. Now, after the publication of weak statistics, it significantly decreased. Note that in the United States the rate is +0.375%, while in the Eurozone it is equal to zero. However, such a difference in favor of the United States does not make the balance of the current account positive. Nevertheless, in the first quarter of 1991, it was positive for a quite long time.
On the daily chart EURUSD: D1 has been moving in a long-term neutral trend for a year and a half. Now, it tends to rise and has exceeded its 200 – day moving average line. The MACD indictor has formed the signal to buy. The Parabolic indicator still indicates sale, but its signal may serve as an additional level of resistance that must be overcome. The Bollinger bands have contracted a lot which means lower volatility. The RSI indicator is neutral and has not reached the overbought zone yet. No divergence. The bullish momentum may develop in case euro exceeds Parabolic signal and the resistance line of the short-term downtrend at 1,128.
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This level may serve as a point of entry. The initial stop-loss may be placed below 200 – day moving average line at 1,107. After opening the pending order we shall move the stop to the next fractal low following the Bollinger and Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level at 1,107 without reaching the order at 1,128, we recommend cancelling the position: the market sustains internal changes which were not taken into account.
| Position | Buy |
| Buy stop | above 1,128 |
| Stop loss | below 1,107 |
Market Analysis provided by IFCMarkets