Will the ECB push the Euro lower after Draghi’s comments?

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  • 22.01.2019
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This week’s market outlook will provide insights for the Euro and GBP, DAX30 CFD, US dollar and gold.

Source: Economic Events Calendar 21 January – 25 January 2019 – Admiral Markets’ Forex Calendar

DAX30 CFD

The last week of trading did not deliver anything new in terms of the technical picture for the DAX30 CFD. The German index stabilised in a range between 10,800 and 11,000 points – at least until Friday.

On Friday, we finally made it significantly back above 11,000 points, despite our scepticism for the DAX30 CFD in our last weekly market outlook. But the picture has brightened a little after the crushing defeat of UK PM May’s Brexit deal in the UK parliament.

As pointed out in our technical piece for the DAX30 CFD on Wednesday, the day after the vote rumours suggested that the EU was willing to give the UK more time, and may even take some steps towards Theresa May in negotiations.

With all of these considerations, in combination with the upcoming rate decision of the ECB on Thursday and Draghi’s comments last Tuesday, it seems likely that the ECB will deliver a wait-and-see approach in their monetary policy, putting rate hike speculations in the second half of 2019 off, and will probably also start an attempt to somehow talk down the Euro a little to counter potential negative economic effects the eurozone may face in the months to come.

With that in mind, the move back above 11,000 and towards 11,250/300 seems like an anticipation of a more dovish ECB. Nevertheless, the market seems a little extended on the upside and the risk-reward ratio for long engagements, also in the lower time frames, gets a little unattractive.

Before the DAX30 CFD bulls get too excited: on a daily chart, the overall mood stays bearish as long as we trade below 11,650/700 points and long engagements are only an option on the lower timeframes.

Source: Admiral Markets MT5 with MT5SE Add-on DAX30 CFD daily chart (between 02 September 2017 to 18 January 2019). Accessed: 18 January 2019 at 10:00 PM 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%.

US Dollar

The US dollar stabilised over the last few days, despite the ongoing US government shutdown and resulting fears around a potential downgrading of US debt from several rating agencies.

But before the USD bulls get too happy, keep that in mind that the stabilisation above 95.00 points in the USD Index future seems to be mainly driven by the weakness in the Euro, which has a weight of 58% in the basket of currencies calculated against the USD.

With that in mind, the only chance to make it sustainably back above 96.00 points is with the help of a weaker Euro, but also GBP and JPY. And while GBP will probably see further gains and a push back above 1.3000 with hopes of EU concessions around the Brexit deal (more on this in the section on the GBP below), weakness in the JPY and especially the Euro will most likely only be initiated by a dovish rhetoric of their respective central banks.

After the comments from Mario Draghi in front of the European parliament in Strasbourg last Tuesday, there seems to be a higher than a 50% chance of the US dollar keeping its current momentum.

However, be wary of market uncertainties due to the ongoing shutdown as well as the political instability caused by US president Trump in the coming weeks.

Source: Barchart – U.S Dollar Index – Weekly Nearest OHLC Chart (between January 2016 to December 2018). Accessed: 18 January 2019 at 10:00 PM GMT

Please note: Past performance is not a reliable indicator of future results, or future performance.

Euro

After the break in the EURUSD above 1.1500 in the second week of trading in 2019, driven by the comments from FED member Bostic, the outlook for the Euro seemed initially prosperous and further gains seemed likely.

But not only did the Euro close this first complete week of trading in 2019 below the breakout level of 1.1500, over the last week it dropped even lower and below 1.1400. This happened despite the hopes among market participants that after May’s crushing defeat in the UK parliament, chances of a soft Brexit increased.

The main reason and driver could surely be found in the comments from ECB president Draghi in front of the European parliament in Strasbourg where he emphasised that recent economic developments have been weaker than expected, that there is no room for complacency and still significant stimulus is needed, but also that the ECB has the tools needed in case of a recession.

With these comments, the ECB rate decision on Thursday will be very interesting to watch and chances are running high that the ECB will announce a potential delay of rate hikes in the second half of 2019, not only because of the mentioned economic developments, but also because of the ongoing uncertainties around the Brexit and the likely delay of triggering the Article 50.

In this context, further losses in the EURUSD seem likely with a potential first target to be found around the 2018 yearly lows, which ranged from 1.1200 to 1.1150.

If the ECB, on the other hand, re-formulates the current status quo (which could be considered a surprise after Draghi’s comments) another push towards 1.1500 becomes an option.

Source: Admiral Markets MT5 with MT5SE Add-on EURUSD Daily chart (between 23 October 2017 to 18 January 2019). Accessed: 18 January 2019 at 10:00 PM GMT

Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EURUSD 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%.

GBP

Over the last week of trading all eyes were on the Brexit deal vote in the UK parliament. All in all it seemed clear that May’s Brexit deal wouldn’t make it through parliament, even though it was a question of how large the margin between “Yes” and “No” votes would be, with a result of less than 100 indicating that only small changes would be needed to finally have a deal and avoiding an unorderly Brexit.

Instead, UK Prime minister May saw a crushing defeat with a margin of 230 votes against her deal which showed that only small adaptations of her deal “won’t get the job done.”

Interestingly enough, the GBPUSD rallied and broke back above 1.2900. The main reason is the comments from ECB president Mario Draghi last Tuesday about the economic situation in the eurozone, which make it seem as if market participants have already started to anticipate concessions of the EU towards GB.

And after May won the confidence vote on Wednesday, gaining another three days to come up with an alternative option, to be presented today, January 21. This option could be the start of a sharper rally in the GBPUSD back above 1.3000 if it points to a Soft(er) Brexit.

Nevertheless, from a technical perspective the overall picture on a daily chart stays bearish in the GBPUSD as long as we trade below 1.3270/3300. However, the first step towards a bullish trend has taken place with the breakout out of the trend channel (blue).

Source: Admiral Markets MT5 with MT5SE Add-on GBPUSD Daily chart (between 02 October 2017 to 11 January 2019). Accessed: 11 January 2019 at 10:00 PM GMT

Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the GBPUSD fell by 5.9%, in 2015, it fell by 5.4%, in 2016 it fell by 16.3%, in 2017
it increased by 7.4%, in 2018 it fell by 5.6%, meaning that after five years, it was down by 22.9%.

Gold

The picture for Gold hasn’t changed over the last days and with our still sceptical outlook for the USD, we still seem to have a very good chance for a push back above 1,300 USD/ounce, even after the weak weekly close.

In this context, we’d like to emphasise again the current bullish seasonal pattern in which we find ourselves currently, lasting from Monday, January 14 until of February 5.

During this time span, in the past 20 years Gold saw an average gain of 30.61 USD/ounce for 15 years, and lost on average 12.86 USD/ounce in those 5 other years.

And as long as we trade above 1,275/277 USD/ounce, our target of at least 1,308/310 USD/ounce on the upside for Gold remains active.

Source: Admiral Markets MT5 with MT5SE Add-on Gold Daily chart (between 06 December 2017 to 18 January 2019). Accessed: 18 January 2019 at 10:00 PM 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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