EUR/USD: Bright picture of eurozone recovery
Macroeconomic overview: European Central Bank President Mario Draghi stressed once again that the central bank’s goal is to “ensure price stability and price stability is defined as an inflation rate which is close to 2%”, adding that “today that means we are not there yet” and that “that is why monetary policy remains extraordinarily accommodative”.
The September PMIs paint a bright picture for eurozone growth, recording a strong increase both in the manufacturing and services indices from already solid levels. The Composite PMI rose one full point to 56.7, de facto matching the cyclical high hit in the spring. In quarterly terms, the average for the third quarter 2017 is 56.0, only moderately below the second-quarter 2017 number, when GDP expanded at an annualized pace of 2.5%. The recovery displays remarkable resilience to recent euro appreciation, indicating that strengthening domestic demand and supportive global growth are offsetting any FX-related drag that may have emerged at this stage.
The manufacturing PMI rose to 58.2 from 57.4, although the improvement was not homogeneous across subcomponents. The output index surged to 59.5 from 58.3, while the new orders index stabilized at a solid 58.3, with export orders down to 57.1 from 58.5. This latter detail might signal some small initial impact from currency appreciation, although the PMI press release does not report any material concern among the polled companies. The employment recovery is gaining traction (56.8 from 55.5) while, on the inflation front, both input and output prices accelerated further.
The services PMI improved to 55.6 from 54.7, driven by a combination of strengthening outstanding business (53.2 from 51.5), new orders (55.6 from 54.5) and employment (53.7 from 53.3).
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At the country level, Germany and France performed strongly, with both their Composite PMIs rising by 2pts to 57.8 and 57.2, respectively. Given that the eurozone Composite PMI improved “only” by 1pt, it is likely that the performance in Italy and/or Spain was not as buoyant as in the core of the eurozone.
With the output gap closing at a fast pace in the last three to four quarters, the ECB can overlook weak inflation numbers and feel confident to start reducing the pace of monetary accommodation. However, the central bank’s exit is likely to be slow, with monthly net asset purchases reduced to EUR 40bn in the first half of 2018 and to EUR 20bn in the second half of 2018.
Technical analysis: A rebound and positive close on Thursday negates Wednesday’s bearish signals. EUR/USD has continued to gain into Friday to a fresh recovery high at 1.2004. Wednesday’s peak at 1.2035 is the next important resistance level.
Short-term signal: As we had expected, rapid sell-off on Wednesday was not continued and now we the EUR/USD is back on the upward path. We keep EUR/USD long for 1.2250.
Long-term outlook: Bullish
USD/CAD: Short for 1.1930
Macroeconomic overview: The Canadian dollar edged lower on Thursday against the USD as oil prices dipped, but pared some losses after domestic data showed much stronger-than-expected growth in wholesale trade.
The 1.5% increase in July wholesale trade exceeded economists’ forecasts for a decline of 0.9% and was the biggest increase since January. Stripping out the effects of price changes, volumes were even stronger, up 2.1%.
The strength of the data has boosted the outlook for growth in the economy for the month, offsetting soft manufacturing data.
The market will turn to Canada’s retail sales report today, for further clues on prospects for July gross domestic product. The country’s August inflation report is also due on Friday. A jump in inflation could trigger in October another interest rate hike by the Bank of Canada.
Prices of oil, one of Canada’s major exports, gave up some recent gains before a meeting of oil producers that could extend production limits aimed at clearing a glut.
Technical analysis: The corrective move is likely to be over. Yesterday’s shooting star is a sign of reversal. The next target for USD/CAD bears is 1.1920, full retracement of 2015-2016 rise.
Short-term signal: We got USD/CAD short at 1.2275 today. The target is 1.1930.
Long-term outlook: Bearish
TRADING STRATEGIES SUMMARY:
FOREX – MAJOR PAIRS:
FOREX – MAJOR CROSSES:
PRECIOUS METALS:
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1. Support/Resistance – three closest important support/resistance levels
2. Position/Trading Idea:
BUY/SELL – It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
LONG/SHORT – It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.
3. Stop-Loss/Profit Locked In – Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.
4. Risk Factor – green “*” means high level of confidence (low level of uncertainty), grey “**” means medium level of confidence, red “***” means low level of confidence (high level of uncertainty)
5. Position Size (forex)– position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
Position size (precious metals) – position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size).
6. Profit/Loss on recently closed position (forex) – is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
Profit/Loss on recently closed position (precious metals) – is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
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