EUR/USD about to break below the 1.19 handle?
- EUR/USD bears taking back control.
- EUR/USD technical dip is complete.
EURUSD is retaining most of the gains accumulated last week amid signs of a possible compromise in German politics. Currently, EUR/USD is trading at 1.1916, down -0.12% on the day, having posted a daily high at 1.1962 and low at 1.1905.
"Markets were encouraged on the news last week that the SPD could be willing to participate in a coalition with Chancellor Merkel and strong economic momentum in the Eurozone, reflected in the record IFO survey for Germany," explained analysts at Scotiabank.
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Meanwhile, markets were waiting for the US to return on Monday where some volatility had been expected to reemerge, but in the absence of catalysts, we have seen a simple grind higher in the dollar throughout the US session, sparked to life to some degree by upbeat housing data and FX resuming their focus on the Eurozone-US short-term yield spreads that remain at or near historic highs, tempering the euro's strength vs the greenback as we progress throughout the US shift.
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"We expect EURUSD to remain well supported in the near-term and to retest the early Sep peak (at least) in the next few weeks. Bullish sentiment is reflected in elevated EUR risk reversals (premium for EUR calls)," argued the analysts at Scotiabank.
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For the week ahead, the core PCE inflation reading (Thu) will be the highlight of a busy US calendar with investors mindful of the Fed's structural low US inflation concerns as noted in the latest FOMC minutes. Analysts at ING noted that "core PCE is the central bank's preferred measure of inflation - and with the prior month's reading running significantly below the 2% target at 1.3% YoY - it's no surprise why the Fed doves are sounding the alarm. We may need to see more than just a trickle up to 1.4% YoY (consensus) to spur any major inflationary sentiment."
Risks in US politics this week?
Also, there will be risks associated with the next round of progress in the US tax plan reforms; (The Senate appears to be set to hold a floor vote on the tax reform). Additionally, the probe into Russia's attempt to influence last year's US election took another turn with reports suggesting former national security adviser Flynn has stopped talking to the White House, which perhaps signals his cooperation with the special investigation, led by Mueller.
Solid gains for EURUSD over the past few weeks frustrated negative technical signals (break under 1.1675) through late Oct so we are a little cautious about over-interpreting the near-term outlook for the EUR, explained the analysts at Scotiabank, adding:
"However, technical developments through Nov are unreservedly bullish (outside range month) which suggests the dip in the EUR from the early Sep peak is complete at least. Technically, gains last week through resistance through the low 1.17s initially and 1.1875 area (now support) confer a very positive outlook for EURUSD in the next 1-2 months and suggest upside risk towards the upper 1.21 area."