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How the Euro Could Defy Analysts and Options Market Ahead of Fed

Published 24/01/2020, 15:23
How the Euro Could Defy Analysts and Options Market Ahead of Fed

(Bloomberg) -- Euro bulls may be looking at a longer wait before they can break free, with a compelling case that the shared currency may head lower into next week’s Federal Reserve monetary policy decision.

It comes in defiance of consensus views among analysts for the euro to rebound, an expectation also reflected by current pricing in the options market. The common currency slipped to a seven-week low of $1.1026 on Friday, at a time when the median estimate of analysts in a Bloomberg survey calls for a move to $1.1400 by end-June and sentiment through options remains bullish for the common currency. That’s turned the currency’s charts bearish in the short-term and may leave long positions looking exposed.

The euro failed to gain traction even after euro-area composite PMI data offered pockets of promise and the European Central Bank warned investors not to assume that policy is on autopilot mode. Momentum selling emerged earlier when the Governing Council’s meeting on Thursday didn’t offer signs that it was looking to tighten monetary policy soon.

Volatility in the euro fell to fresh record lows this week, a pattern that supports the case of it being used as a funding currency of choice for carry trades. That came as Europe became the focus of global trade relations, after U.S. Commerce Secretary Wilbur Ross said tariffs on auto imports from the European Union remained under consideration.

The main check point for the market next week is Wednesday’s Fed rate call. Any rebound for the euro may depend on U.S. monetary policy rhetoric sounding more-dovish-than expected. A strong aversion to riskier trades and the ongoing dominance of tight ranges in the spot market could also help.

But don’t forget that the Fed isn’t expected to cut interest rates any time soon and the hurdle remains high for officials to sound outright dovish as the latest data have positively surprised the market, undermining the chances for a euro boost. That leaves the shared currency’s bulls looking for traction elsewhere. Market jitters over the economic effects of a China-originated virus could prompt outflows out of emerging markets and back to the euro area.

Euro bulls’ best chance may be with short-term traders who look to fade dips as expectations for a large move next month stand at multi-year lows. Technically, the euro remains in a bearish trajectory below its 55-daily moving average, currently at $1.1095, and may target a move below $1.0950, which could satisfy the projection of a head and shoulders pattern that was completed this week.

A lower volatility environment has pressured the euro in the past two years, yet at the moment it is just what could offer some short-term relief.

What to Watch:

  • Chinese New Year Saturday; Italy holds local elections in the region of Emilia-Romagna the following day in the latest challenge for the ruling coalition
  • Fed Chairman Jerome Powell holds a news conference after the FOMC rate decision on Jan. 29; highly-anticipated Bank of England policy decision comes the next day; Governor Mark Carney to speak
  • Policy maker speeches coming up include Bank of Canada’s Deputy Governor Paul Beaudry and Riksbank Governor Stefan Ingves
  • Economic releases include euro area GDP and CPI; U.S. personal spending, GDP; Sweden retail sales and Norway unemployment; see data calendar
  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

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