Dovish Tapering, Catalan Issue Turns Euro Weak

Dovish Tapering, Catalan Issue Turns Euro Weak

 
An improvement in the Euro zone economy strengthened the Euro dollar against the G10 currencies in the past two months. In particular, the Euro had been on an uptrend against the Swiss Franc since May 2017. However, in the past two trading sessions, the EURCHF pair has lost about 150 pips to close at about 1.1580 on Friday. We anticipate the EURCHF pair to undergo a deeper decline due to reasons given below.

Last Thursday, the ECB announced it would trim down the size of bond purchases to €30 billion per month from January 2018 onwards. Currently, the ECB is purchasing debt instruments to the tune of €60 billion in order to inject liquidity into the EU and propel economic growth. Even though the market had expected the quantum of tapering, still, the statement that accompanied the announcement turned the sentiment bearish towards the Euro. The ECB, in its monetary policy statement, stated that it would reserve the right to extend the program after September 2018, and also increase the volume of purchases, if required. Further, the monetary policy authority also stated that it would continue to maintain a low interest regime for an extended period of time to ensure inflationary pressure reaches the desired level. Notably, the ECB also informed that it would reinvest the proceeds from monthly maturities.

The Euro has also turned weak after the Catalan parliament approved the independence proclamation. If independence becomes a reality, then Catalonia may leave the single currency and the EU. In this regard, credit rating agency Fitch had announced last month that it stands ready to reassess Catalonia’s rating if there is an escalation of tension. Catalonia currently has a BB- rating from Fitch.

The tensions between the US and North Korea has once again escalated after the latter conducted mass evacuation drills, a sign of preparation for a full scale war. The rise in geopolitical tensions has once again increased the demand for safe haven assets such as the Swiss Franc. Thus, fundamentals support a downtrend in the EURCHF pair.

The EURCHF pair has broken the ascending trend line as shown in the image below. Further, the MACD histogram reading has turned negative. The next major support for the pair exists only at 1.1480 levels. Thus, we forecast a continuation of the current decline.

EURCHF - Technical Analysis - 30th October 2017

A short position may be opened in the EURCHF pair, near 1.1580 levels, to gain from the downtrend. To keep the risk to a minimum, we will also place a stop loss order above 1.1660. We will cover the short position when the pair falls to 1.1480 levels.

As a binary trader, we may purchase a put option and position ourselves to gain from the anticipated decline. If we decide to go ahead with the purchase of the option, then we would look for a strike price of about 1.1580 and an option expiry date around November 7th.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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