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2015

Euro Research Report

Published: Thursday 24 December 2015

The downtrend continued in December following the highly anticipated European Central Bank announcement. The Sterling Euro had lost over 8 cents in the past three weeks and now resides near the two month lows. Technically Sterling Euro looks oversold and appetite for the Euro is waning having found support at the 1.35 - which may act as a base for a corrective move higher. Sterling Euro however is still bearish and stuck within a downtrend so will need confirmation of a break before confidently saying higher.

The Euro weakened significantly in the lead up to the announcement, as ambitious traders thought the ECB would unleash weightier stimulus measures in another attempt to kick-start the Eurozone economy. Every metric of the ECB’s easing was less than expected, they extended its asset-purchase programme by six months to March 2017 when the market was looking for 12 months and failed to expand the programme on a monthly basis as many investors had hoped for. As the market had priced in more stimulus measures, this resulted in a short squeeze of mass covering of short Euro positions.

 

The announcements prompted speculation that ECB President Draghi had been reined in by Jens Weidman, the president of the Bundesbank who had argued that the latest round of monetary easing from the bank was not needed. ECB President Mario Draghi has sought to reassure financial markets after the announcement that they would step up the stimulus efforts if needed to bring inflation back to target, however he was content with the present measures so far.


Sterling has experienced sustained selling pressure, making it one of the weakest performing currencies for the month. This was a result of a shift in the market expectations of when the Bank of England would initiate their first rate hike, which was expected to be shortly after the Federal Reserves. Martin Weale, who is one of the voting members of the Bank of England, is considered to be a hawk has recently shifted his stance noting that the need for rate hike now is "slightly less immediate" as deflationary factors become a bit more "prolonged" and that there was more "breathing space" for the central bank.

Data from the UK was a mixed bag for this month which has made it difficult for the Bank of England to paint a clear picture on the outlook for 2016. What is clear is that Britain’s economic growth has been effected by slow demand for exports due to a flagging global economy. The service sector once again underperformed attributing to a weaker GDP which grew 0.4% in the third quarter matching its lowest rate since late 2012.  Retail sales however rose sharply in November by 1.7% beating all expectations and the unemployment rate once again ticked lower to mark a 7 year low. Despite the drop in the unemployment rate, wage growth across the economy has slowed to 2%. This phenomenon has continued to perplex policymakers.  Meagre wage growth and benign inflation rate - which has only turned positive for the first time in four months - supports the view that the Bank of England has more reasons to remain cautious about the timing of its monetary policy tightening cycle.

 

For Euro Buyers


For clients with a long requirement Sterling Euro is still within a major uptrend which begun back in July 2013, so protection is needed below the October low and this major uptrend. The move lower so far has been relentless, but the speed of the move is unsustainable so expect a correction soon. If we break the minor down trend, then the next level to target would be 1.3850.
 

For Euro Sellers


Once again you have been presented with an excellent opportunity to reduce your exposure around the current levels. With your remaining requirement, use the minor downtrend to your advantage whilst it is still intact. This may allow you to target some lower levels but watch for a correction which is overdue. Protection above 1.37 in the way of a stop loss is also key.

We are here on all but the public holidays although our hours will be slightly reduced to 08:30 to 17:30 next week and we will endeavour to get everyone away from the office by 16:00 today.
 
If you do need to trade today, you really need to do that early on this morning. Because banks wind down payment operations early, we won't be able to guarantee same day delivery for anything booked after 11:00am. Your Halo FX consultant will be happy to suggest levels if you’re keen.




 
Technical Research by Denzil Rickerby