What will cause the euro to rally?
Tomorrow morning we get the new US NFP Report. The consensus guesses are for 180K new hires, a hearty jump from last month's 38K. The US unemployment rate is forecast to be a tick higher, 4.8% up from 4.7%. While great importance is attributed to this report, the government employees who prepare the report have a great deal of discretion in their estimates. This frequently results in seemingly mysterious numbers that do not match observations from the private sector.
Obviously a number far different from the anticipated can jolt the market. I am perplexed, however, how such a surprise would impact the EURUSD. If the number comes in better than expected, this might result in USD strength as a few traders might revive the rate hike story. With the pending November election, and the Washington establishment determined to reelect their favorite, my guess is there is zero chance for a rate hike before December. A small number takes away any thoughts of a rate hike, but elevates fears we are headed for a recession. In neither situation can I envision a reason for a sustained euro rally.
The report arrives after the FX markets have been dealing with the fall out Brexit. The fifteen plus percentage depreciation in the pound has resulted in investors shuffling their investments. The big winner may have been the Japanese since the yen is regarded as a safe haven. How long this remains I question, since the stronger yen will seriously hurt their economy. Additionally the spread in yield between Japanese and US bonds strongly favors US Treasuries. Consequently the USD may become the favored safe haven.
The Brexit vote took the EURUSD down near the 1.09 handle but has since recovered to just shy of the 1.12 handle, Currently we are trading at 1.1065. In my opinion a rally above 1.11 should be sold. The sharp depreciation in the pound will, in time, be beneficial to the British economy and slow the trade imbalance with the EU. Britain had been importing about 850K of German cars per year, for example, a number that is sure to contract.
If we look at the weekly chart, we can see the EURUSD has been in a wide trading range for several years. Will the pair remain range bound if the global economy contrasts? As we have mentioned in the trading journal, there are some real risks in the EU banking system. A bail out is need for an Italian bank and late today it was reported a bank the Bremen Landesbank was in danger of failing. In addition the huge Deutsche Bank is loaded with questionable assets. I expect this pair can work toward the bottom of the trading range as the market becomes more aware of the problems in the EU.
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ABOUT THE AUTHOR Ralph Shell has enjoyed an extensive career as a professional trader, trading his own personal account profitably for over 20 years as a member and floor trader at the Chicago Board of Trade and Kansas City Board of Trade. In his early years Ralph studied economics and history as a graduate at Duke University. He traded his first foreign exchange contract in futures and options over 30 years ago and specialized in commodities. He has worked as a floor broker, analyst, and Assistance Regional Manager for various companies including Merrill Lynch and Refco. Previously an opinion leader at the investing mega-site seekingalpha.com, Ralph now writes exclusively for cashbackforex.com.
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