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Could EUR/USD and Ibex rally despite economic and political uncertainty?

Eurozone woes continue amid manufacturing decline and Spanish political uncertainty. However, while the Ibex and EUR/USD could move lower, a bullish case appears to be building.

This week has seen the green shoots of a recovery in the eurozone, with improved Leibniz Centre for European Economic Research (ZEW) economic sentiment, consumer confidence and purchasing managers index (PMI) surveys. However, there are still a number of major economic and political issues looming large over the euro and Ibex.

The data released this week has provided some respite to the incessant EUR/USD selling seen throughout the first two weeks of February. However, while we are seeing the euro find some momentum, a closer look at the data continues to provide a worrying picture. Firstly, looking at the sentiment data released by both the ZEW and Eurostat, both data surveys provide an overwhelmingly pessimistic outlook, despite improved figures compared with previous months. This reflects a wider anxiety over the direction of business and growth as Europe moves through a period of great uncertainty. A slowdown in global trade, Brexit fears, and a breakdown in trade relations between the US and EU have hit the region hard.

Today’s PMI surveys have added another key indicator to the mix, with France the only bright light in an otherwise worrying set of releases. With French services and manufacturing beating expectations, the worry instead lies within the deterioration of eurozone manufacturing. US President Donald Trump’s attack on the trade surplus in goods enjoyed by the likes of China and the EU certainly does provide a more bearish backdrop for the sector. Thus, the continuation of this trade war is likely to play a pivotal role in the eurozone growth story.

Another key dimension to eurozone woes has been a political one. With the Italian deadlock broken after a standoff which saw the European Commission and new Italian coalition clash over the plans for a new expansive budget. However, with traders happily leaving the Italian issues behind them, we have now got Spanish volatility on the agenda, with the government calling a snap election after failing to receive approval for their planned budget. One of the main drivers behind that rejection is the inability to convince Catalonian MPs to back the deal, with promises to discuss their grievances failing to garner their support. Their demands for an independence referendum are unlikely to ever be met, yet for traders that is a critical threat to the euro if it does gain any traction.

However, in all likeliness, this election could see a move in the opposite direction, with anti-separatist sentiment driving popularity for far-right groups such as Vox (who want to limit regional autonomy). While December saw the party gain the first far-right votes since the 1970’s, this election could see the party gain greater influence in a coalition. Thus, traders should keep a close eye out for polls for the role Vox will play in any future coalition. With poorer areas of Spain reliant upon Catalan funding to get by, there is a chance that we could see growing support for Vox, limiting the possibility of any such breakup of Spain. Unfortunately for the Catalan separatists, their decision to vote against the recent government could come back to bite them if Vox gains a stronger foothold in April. Thus, while we are set for two months of political uncertainty in Spain, this could be a process which results in greater certainly over the issue of a possible Catalan breakaway.

With this in mind, the failure to find a solution to US led trade talks, coupled with the threat of a rise in political uncertainty could see EUR/USD fall further, continuing the trend of lower highs and lows seen over the past year. However, with these issues remaining temporary, there is a feeling that this could be a period of base building before we see a surge once more. For the time being, the upside we are seeing could be fleeting as we post another lower high and head lower.

However, looking at the weekly chart we can see an inside trendline providing support over the past six months. This points towards a potential rebound coming into play before long, with the stochastic oscillator closing in on trendline support within a symmetrical triangle formation.

Looking at the Ibex, we can see that the index has reached a pivotal point of resistance. The past 14 months of the Ibex downturn have happened under the cloud of a huge push for Catalonian independence. With this election potentially reducing the chance of a breakaway Catalan state, it comes at a time that we could also see the market show signs of a bullish reversal. Watch for a break through 9236 as a signal that we are set for a protracted period of upside for the index. Until we see that level broken, there is also a chance we could see the sellers come back into play once more.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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