1Finance

Euro Q1 2017 Forecast - EUR/USD Enters 2017 Positioned for More Downside



Fundamental Analysis

• "On the US Dollar’s side, the decision in December 2016 to signal three rates in 2017 – as opposed to the market-priced two ahead of the policy statement – has sent US Treasury yields higher. As a gauge of long-term growth and inflation expectations, the US Treasury yield curve steepening is a reflection of the market's belief that tighter monetary policy is coming in the near-term."
• "On the Euro side, the European Central Bank’s decision in December 2016 to alter its QE program proved significant. In our Q4’16 forecast, we said “The ECB will very likely be forced to remove the -0.40% barrier (allowing more German bunds to be purchased), or to remove the capital key restriction (allowing more peripheral sovereign debt to be purchased).” By going the former route as opposed to the latter, the ECB has primed the Euro to be in a disadvantageous position if interest rates elsewhere continue to rise."
• "By the end of Q1’17, traders should start to pay more attention to European politics. On March 15, 2017, the Dutch elections will be held, the first of four significant elections in 2017. After the dramatic ‘No’ result on the December 4 constitutional referendum, Italy will likely head to the polls again by mid-2017. Luckily, for the Euro, the lack of reform that cost Matteo Renzi his job as prime minister may keep the Italian political system broken enough to prevent the Five Star Movement from ever achieving enough power to pull Italy out of the European Union. In April and May 2017, French presidential elections will be held, and the country will face its own populist threat in Marine Le Pen. Later in 2017 (date TBD), German elections will be held amid an environment in which Angela Merkel’s popularity Is quickly sliding (at five-year lows in December 2016) thanks to her immigration policy and an expanded terrorism threat in Europe. Needless to say, for those who thought 2016 was a year of surprises and shocks, 2017 is sure not to disappoint."

Technical Analysis

• "We were looking for signs of a turn higher in Q4’16, but that didn’t happen. Instead, EUR/USD broke lower in a significant way. In our Q4’16 EUR/USD forecast, we wrote about the extremely coiled environment persisting in the pair, noting, “according to the measure, EUR/USD is the most coiled in history. It’s been 81 weeks since the last 52-week high or low. The previous record was 77-weeks, which ended with the breakout in May 2002.” Furthermore, “if the March 2015 lows break, then the call for a bottom is wrong and focus would shift to 0.9450-0.9550 (historical inflection point and measured objective).” This zone is in play in Q1’17 and is reinforced by the 61.8% retracement of the 1985-2008 rally at 0.9608."
• "Strength through the median line from the bearish channel, which was resistance throughout 2016, would trigger a major bearish trap and shift focus to the downtrend line in the mid-1.2000s later in the year (fitting with the idea of the US Dollar rising then falling over the course of 20170."

the source