It is possible that a 5 wave decline is complete from 15149 and that a larger 2nd (or B) wave is working higher towards 13825-14030. However, impulses (5 wave movements) usually contain an extended wave among waves 1, 3, and 5. Wave 3 is slightly longer than 1 in the sequence from 15149 but not exceptionally so. Also, a common end point for wave 5 is an extension of waves 1 through 3 by 61.8%. The Fibonacci measurements described cluster from 12300 to the mid 12700s. As long as price is below the channel line, the downside remains favored.
Strong gains in US Nonfarm Payrolls data, surprising strength in ISM Services figures, and an impressive jump in US Pending Home Sales numbers combined to boost Federal Reserve interest rate expectations—fueling short-term dollar gains in the process. Overnight Index Swaps now predict that the Fed will raise rates by a total of 100 basis points in the coming 12 months—a full 32 basis points more than the European Central Bank. As far as expectations are concerned, this should continue to bolster the Greenback and could potentially send the EURUSD lower.
The medium-term EURUSD price trend points to further losses, and bullish developments in yields further support the case for US Dollar strength. It will be critical to watch subsequent Fed interest rate announcements to gauge the likelihood of rate hikes through the foreseeable future.
While the Euro has pulled back significantly over recent months, prices remain substantially overvalued relative to the PPP-implied exchange rate. Continued losses seem likely as EU policymakers continue to struggle to come up with a stable solution to the debt crisis in Greece, with the markets clearly skeptical about the IMF-assisted bailout scheme introduced last month. Indeed, an auction of 12-year Greek bonds following on the heels of the rescue plan’s announcement raised just 390 million euro, falling short of the 1 billion on offer, while the spreads on Greek credit default swaps rose and those between Greek and German 10-year bond yields rose to begin April at the highest levels in over a month. Adding fuel to the fire, the government in Athens is now reportedly seeking a new bailout package that does not include the IMF – an option that is staunchly opposed the leading economies in the region (i.e. Germany and France) –because the international lender’s conditions for offering help are seen as too painful. The sloppy approach to the situation bodes ill for the single currency, leaving open 2234 pips in losses yet to be corrected before prices approach “fair value” levels. After all, if the EZ can’t muster a response to troubles in a small member state like Greece – just 2.6% of the currency bloc’s economy – then what kind of havoc could investors expect if a country like Spain (11.8% of EZ GDP) or even Italy (17% of EZ GDP) met a similar fate?
What is Purchasing Power Parity?
One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.
DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.
No comments:
Post a Comment