EUR/USD sold off aggressively

EUR/USD has been sold aggressively of late and the question many are asking now is whether the move below 1.3800 represents a buying opportunity.

The fact EUR/USD fell to 1.3749, but then subsequently rallied, and for now seems to be holding the 38.2% retracement of the recent February to March rally at 1.3878 is positive. However, the bulls will want to see this retracement as a platform from which to advance and close the week above the multi-year downtrend at 1.3815 (as shown on the chart). We shall see how traders act in European and US trade, as a close back above 1.3815 would show a lot about the psychology of traders.

Fundamentally I like the pair lower over for the rest of the year, but the big trading opportunity seems to be passing us now that the Fed has provided the market with a more hawkish backdrop. This should keep EUR/USD from moving materially past 1.40, however had we not seen the Fed detail that it is likely to raise rates around May and EUR/USD continue to gravitate towards 1.45, then the prospects of the ECB having to act significantly more aggressively would have increased dramatically. This in theory could have meant unsterilised bond purchases, or quantitative easing as we know it. The prospect of extreme volatility in the EUR would have been very appealing to short-term traders.

Alas, the Fed managed to achieve what the ECB clearly can’t and that is weaken EUR/USD. Still, given the outperformance of peripheral bond and equity markets, driven by strong earnings per share expectations for European stocks relative to the US market, as well as the European regions current account surplus, it’s hard to be overly bearish on the pair.

The capital markets are in a transmission period right now and investors and traders alike are trying to understand which central banks could become more dovish and ease policy, or on the other hand, which central banks will be the first to move on interest rates.

We’ve already seen the RBNZ lift its cash rate and will likely raise again at the next meeting, while the BoE has suggested it could move around the start of Q2. There are still a lot of question marks on what the RBA will do, but if the Fed reverts to a fully neutral position in November by finishing its asset-purchase program, mixed with the prospect of raising rates in May, it suggests EUR/USD could fall to the low 1.30 region this year.

Naturally this all depends on whether economics sticks to the script and we see better economic growth in the developed world, China growing around 7.5% and Japan avoiding another recession through the increase in its planned consumption tax rise. 

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