The main currency pair has outlined the boundaries of the medium-term trading range and is not going to leave it until the new driver is just around the corner. What can make the EUR/USD pair break above 1,188? Most likely, a sharp acceleration of European inflation, which will compel the ECB to make adjustments to its monetary policy. Judging by the slowdown in the CPI of the eurozone from 1.5% to 1.4% in October, the likelihood of implementing such a scenario is not high. Even taking into account the deferred effect of rising prices for Brent crude oil above $60 per barrel, we can expect inflation to accelerate only in the first half of 2018.
On the other hand, the dollar does not have many drivers to break support at 1.1575. The futures market is almost certain that the Fed will raise the federal funds rate to 1.5% in December and that it is also not in a hurry to lay the probability of a more aggressive monetary tightening of the US Central Bank in 2018 in the prices of dollar pairs. Passing tax reform through the Congress threatens to drag on, which will weaken the position of the «bears» in the EUR/USD pair.
Both economies look very good, the divergence in monetary policy has so far decided to take a break (at least until the end of 2017), the political risks after a favorable resolution of the conflict around Catalonia are approximately at the same level. Therefore, the main driver of the change in the prices of the main currency pair are capital flows on stock markets in the US and the eurozone. Following the decision of the ECB to extend the implementation of its quantitative easing program, at least until the end of September next year, the potential of European indices appears higher.
First, the policy of easy money in the eurozone allows you to rely on the liquidity flows from the Central Bank. Let the scale of QE be reduced from 60 billion to 30 billion euros per month, but taking into account the reinvestment of income from canceled bonds (around 10-15 billion euros) the amount is still high. Business activity in the manufacturing sector of the eurozone in October reached its peak records from 2000, which allows us to count on maintaining a positive momentum in the GDP movement. Debt market rates remain ultra-low, and the gradual stabilization of the euro’s exchange rate will improve the financial results of corporations.
Dynamics of the S&P 500 and central bank balances
Source: Goldman Sachs.
Therefore, capital inflows to the European stock market, which has become one of the key drivers of the growth of the EUR/USD pair following the victory of Emmanuel Macron in the presidential elections in France, will remind us. Of great importance will be whether non-residents will insure foreign exchange risks? I believe that if the euro was worth $1.2, the answer to this question would be positive. Another point is the trading range 1,1575-1,188. Within its limits, the probability of a hedge is not so great, which is a «bullish» factor for the main currency pair.
Technically, the breakthrough of support at 1.16 will increase the risks of implementing target points by 161.8% and 200% on the AB = CD pattern. On the contrary, the breakthrough of resistance at 1,168-1,169 will instill in the bulls a hope for growth in the prices of the EUR/USD pair towards the upper boundary of the downward trading channel.
EUR/USD, daily chart