By Mauro D'Urbano
Ignoring the positive NFP data and the strength of US job market, the single currency spiked to 1.0965 on Monday on China and oil weakness. But the medium-term outlook is still negative.
A few weeks ago EUR/USD has broken the bearish flag, what resulted in a potential move towards parity over the following months. Such scenario would be also coherent with the past symmetrical triangle, as there is still room to reach its target.However, since the beginning of the year we entered in a Euro-supportive risk-off mode.
Worries come from China, after a sequence of significant and scary Yuan devaluations. Chinese authorities shown to be inexperienced and keep changing the regulatory system too often. The PBoC acted in order to limit the sell-off in equity markets, resulting in 2 consecutive short trading sessions (-15% in 2 days). Things went a little better after removing the circuit breaker, while keeping the Yuan steady during the last two trading sessions.Oil prices keep declining, as there seem to be no agreement on reducing the excess of supply and the demand is steady.
Furthermore, geopolitical tensions between Saudi Arabia and Iran do offer no help in solving the issue.Nevertheless, we may be approaching the bottom and those temporary factors should dissipate over the medium term. First, Chinese economy appears quite solid even after the recent slowdown, and there is no reason to panic despite the lack of clear communications from Chinese authorities. Secondly, oil prices may find support around the 30-32$ area, as the market is deeply oversold.
Fundamentals support a recover in equity markets and a consequent continuation of the EUR/USD downtrend once risk appetite returns.
Furthermore, the monetary policy divergence between the Eurozone and the US is still quite large. The QE program launched by the ECB should last at least until March 2017, as there are no signs of inflation pick-up despite some economic improvement. On the contrary, the Fed is expecting to keep raising its federal funds rate, widening the interest rate differential, what should push investors towards the US Dollar.
To summarize, should the volatility and global fears increase, EUR/USD would have still some short-term upside potential. However, as both technical and fundamental analysis support our scenario in the medium-long term, we expect EUR/USD to move downward, as soon as oil prices will react and some optimism will come back on track.
