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Daily Reports 17

EURUSD appears rangebound

By David Morrison  |  06/02/2019 15:45

The Fed’s dovish pivot and weakening economic data from across the euro zone is helping to keep the EURUSD rangebound for now
Whether one considers the EURUSD or Dollar Index (which is heavily-weighted towards the euro), it’s evident that the US dollar is currently stuck in a relatively narrow trading range. Since mid-November last year, the EURUSD has rarely strayed much above 1.1500 or below 1.1300, and currently hovers somewhere near the middle. Of course, a period of consolidation is to be expected given the 8% decline in the euro (and corresponding gain in the dollar) over the past twelve months. But there’s also been a shift in the fundamental drivers of the currency pair.
Fed goes dovish
For a start, the Federal Reserve has performed a dovish pivot with the market effectively pricing out rate hikes in 2019. This removes a vital support for the dollar, even if the current round of Fed dovishness proves short-lived. But that’s not to say that the euro will suddenly be back in favour given the pressures on the economies of countries within the Euro zone. Earlier today it was reported that German industrial orders fell by 7% in December over the last twelve months which is the largest decline since 2012. This has added to fears that the German economy (the largest in Europe) will register contraction in the fourth quarter of 2018, and so join Italy in entering a technical recession. We’ll know for sure next week when we get the first reading on German GDP for the last quarter of 2018. Just last week Bundesbank President Jens Weidmann said that he expects significantly slower growth in 2019 than he did only a few weeks ago as companies struggle to cope with China’s economic slowdown which has been exacerbated by the US-China trade war. European Central Bank (ECB) President Mario Draghi kicked off the New Year with a dovish press conference at the ECB’s first monetary policy meeting, and there’s very little probability of a rate rise this year.

Strong US data
On top of this, the dollar has had a boost from last Friday’s better-than-expected Non-Farm Payrolls and Manufacturing PMI. The data was so strong that it left many wondering why the Fed was backing away from further monetary tightening. It led to a pick-up in US Treasury yields as investors reassessed the probability of at least one rate hike later this year. For now, the US looks like the cleanest shirt in the laundry basket, and that should keep a lid on the EURUSD. Should US economic data continue to be strong, then the EURUSD could break below 1.1300 again. But if it were to start weakening and should the US-Chinese trade talks end without a substantive deal, then be prepared for it to pop higher, temporarily at least.
EURUSD daily chart
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