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European Central Bank rumours trigger another test of 1.1200 in the EUR/USD – will it break?

April 01, 2019 14:30

Economic Events April 1 - 5, 2019

Academic Events Calendar

Source: Economic Events Calendar April 1-5, 2019 - Admiral Markets' Forex Calendar


DAX30 CFD

The DAX30 CFD performance over the last week of trading came as a surprise. After aggressive selling on March 22, and closing out the week 11,400 points, further losses with a target around 11,000 points seems very likely.

This is particularly true after the economic situation in Turkey reached a new level of escalation, and increased risks of a spill-over to other emerging countries as a result.

But instead, the DAX30 CFD drifted upwards and closed the week above 11,500 points. One potential driver can possibly be in the rumours that the ECB is studying a tiered deposit rate to alleviate banks' plight, in an attempt to help stabilise the European banking sector.

Currently, it is difficult to say if the drift in the DAX30 CFD will continue in the days to come. From a technical perspective, it has to be mentioned that we are still trading below the SMA(200), and another sharp drop downwards towards 11,000 points stays on the table.

If the bulls want to regain control, a push back above 11,850/900 points is necessary:

DAX30 CFD index daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between November 23, 2017, to March 29, 2019). Accessed: March 29, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%. Check out Admiral Markets' most competitive conditions on the DAX30 CFD and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours!


US Dollar

After a dovish Fed announcement on March 20, and the resulting drop in 10-year US Treasury yields to its lowest levels since 2017, one would probably expect the USD index future to find itself in a very weak spot, with analysts drawing a very weak picture for the near future.

It is currently very difficult to find anything positive to report concerning the US dollar without being unjustifiably optimistic. The picture for the Euro looks even worse (for further details, refer to the Euro subsection below), the Yen can't profit (yet?) despite an overall favourable environment (again, see the Yen's subsection), and GBP is still tied up in the Brexit mess.

That said, we consider the outlook for the USD's near future to be neutral and unchanging, with a slight bullish touch, particularly if incoming US economic data offers a surprise on the upside.

Only a drop below 95.00 points in the USD index future would darken the picture, another test of the region around 97.50 points stays an option:

USD index weekly chart

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2016, to January 2019). Accessed: March 29, at 10:00pm GMT

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Euro

Currently, we find the Euro in a very weak spot, with the currency pair having approached the region around 1.1200 going into the weekly close.

This weakness comes as a surprise, since 10-year US Treasury yields dropped to their lowest levels since mid-2017, which should usually make strides to stabilise EUR/USD.

This could be due to rumours that the ECB might study tiered deposit rate to alleviate banks' plight which ould have, and will continue to, act as a driver downwards, already resulting in a break out of the existing trading range between 1.1200 and 1.1500.

If these rumors turn out to be true, it would send a clear signal that rates are to remain low for an extended period of time, contrary to the previously-expected rate hike at the end of 2020.

Current speculation should weigh heavily on the Euro in the coming days. And if upcoming US economic data surprises on the upside, resulting in a stabilisation of US yields, a significant break downwards in the EUR/USD should be expected, with an initial target of around 1.1000, and possibly even lower around 1.0900, resulting out of the duplication of the range between 1.1200 and 1.1500:

EUR/USD index daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between November 29, 2017, to March 29, 2019). Accessed: March 29, 2019 at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.


JPY

As we discussed last Friday, the USD/JPY has found itself in a very interesting situation. Not only did 10-year US Treasury yields drop to new yearly lows last week, but several sets of US economic USwere released.

Depending on how the tensely the situation with Turkey plays out, and if we see any spill-over effects on other emerging nations, the USD/JPY is currently resting on the blade of a razor.

As discussed last Friday, it feels very surprising not to see a profiting JPY, particularly against the USD. If a risk-off mode develops, a drop below 109.70 in the USD/JPY seems imminent and quickly result in further losses with a dynamic push down to around 108.50.

If such a scenario doesn't manifest, and the 10-year yield stabilisation continues, and likewise the situation in Turkey does not escalate any further, the USD/JPY could quickly reconquer 110.80/111.00 and go for another test of the region around the current yearly-highs around 112. However, some US economic data sets in the coming days may surprise on the upside.

USD/JPY index 4-hour chart

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY 4-hour chart (between January 15, 2019, to March 29, 2019). Accessed: March 29, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.


Gold

Despite Gold reaching the region between 1,320/330 USD into the start of last week, it later not only surrendered those gains, but dropped below 1,300 USD and didn't improve as it closed the week.

The push downwards comes as a surprise, since 10-year US Treasury yields kept on falling through the end of Q1 2019, hitting the lowest levels since 2017.

This all happened on top of rising tension in Turkey (where Turkish Lira swaps (cost of borrowing liras overnight) pushed on Tuesday to a never-before-seen level of 1,338%, mainly due to Turkish banks avoiding offering foreign speculators liquidity to bet against the Turkish Lira), and the resulting risk of a spill-over effect on other emerging countries. That this combination of factors did not push Gold to profit, is even more surprising.

This signals the possibility that Turkish banks are currently unloading their Gold holdings, in a move to attempt to get liquidity from somewhere while burning through their foreign currency reserves.

If that is indeed the reason, the selling pressure may soon come to an end. And while the overall fundamental picture in Gold still favours the long side as long as the precious metal technically trades above 1,275/277 USD. If one or two US data sets in the coming week disappoints, Gold could soon gain bullish momentum again, focusing again on 1,320/330 USD.

On the other hand: if the selling persists and Gold drops below 1,275/277, further losses could follow with an initial target around 1,240 USD.

Gold index 4 hour chart

Source: Admiral Markets MT5 with MT5-SE Add-on Gold 4-hour chart (between January 14, 2019, to March 29, 2019). Accessed: March 29, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016 it increased by 8.1%, in 2017 it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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