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2015

Euro Research Report

Published: Thursday 29 October 2015



The late half of October was certainly turbulent for the Euro after the European Central Bank President, Mario Draghi hinted they may expand their Quantitative Easing Programme in December; triggering a powerful market reaction. This resulted in the Euro being sold off across the board. Prior to the announcement the Sterling - Euro exchange had been in a downward trend, finding support at the pre-election lows. This move lower proved short lived as the Pound gained significant ground against the Euro, breaking the 200 day moving average in a move that now looks well supported.
 
Draghi highlighted that the risks to the growth outlook remain on the downside; reflecting in particular the heightened uncertainties from emerging market economies and the prospect of a US Interest rate rise, which have reignited concerns over the trajectory of inflation in the Euro area. While the programme appears to have thawed the region’s credit markets, growth remains lacklustre and inflation has fallen back into negative territory.
 
The German economy however is proving remarkably resilient in the wake of the Volkswagen scandal. Business sentiment among Germany's top executives confirmed a decline in optimism, halting the upward trend seen over the past few months although the reading beat analysts' forecast. The Bundesbank expressed that the underlying growth trajectory of the German economy remains intact even though its momentum seems to have slowed in the third quarter of this year.


 
The Preliminary reading of the UK GDP showed the UK economy slowed to a 0.5% growth rate from the previous 0.7%. The slowdown can be contributed to increasing uncertainty and a weaker global economy which has continued to weigh down on production and exports. The UK economy remains excessively tilted towards services sector which account for as much as 79% of the UK’s total GDP and this sector was again the main upward driver; rising a steady 0.7% between the two quarters from 0.6% in the previous 3 months, offsetting a notably weaker construction sector which fell 2.2%; the largest drop since 2012. However even the Service Sector showed it was not immune to a global slowdown this month as the sector expanded at the slowest pace in more than two years.
 
Despite this cooling, the overall economic performance remains the strongest in Europe as well as within G7. This print will ease some of the pressure the Bank of England is under to hike the base interest rate after more than six years of ultra-accommodative monetary policy. 
 

For Euro Buyers:

 
Momentum indicator are still pointing higher and after breaking the downward trend, and closing above the 200 day moving average, this move higher looks well supported. The first level of resistance will be around the physiological level of 1.40 which coincides with 61.8% Fibonacci retracement level. A more optimistic buyer with a longer term requirement should be looking to reduce exposure around the August highs of €1.42, which again coincide with Fibonacci level of 76.4%. Risk protection, in the form of a stop loss order, should be below the 38.2% Fibonacci level €1.3760 or thereabouts.
 

For Euro Sellers:

 
The two month window has snapped shut, and we hope that when you had the opportunity to reduce your exposure you did - as the technical and fundamental indicators are pointing to more upside. The Relative Strength indicator however is showing that we are on the verge of being overbought. However these can remain overbought for some time and the market can continue in the same direction as long as it doesn’t increase momentum. A pullback is likely at some point but the question is when. So look to sell on the dips. With protection in the form of a stop loss above the 61.8% level, in the hope that this move will run out of steam.