Tuesday, December 1, 2015
Despite the Eurozone showing slight signs of economic improvement, it looks as though Mario Draghi and the ECB are poised to increase stimulus later this month. This is really not surprising to anyone, but it will be interesting to see how the currency markets will react to more liquidity in the EU. Traders are pricing in an interest rate hike from the FOMC at this month's meeting and the ECB is not even attempting to hide its hand, all but stating that further stimulus will be added. In these situations, markets can oftentimes take the "buy the rumor, sell the fact" approach, where we could actually see the markets react inversely to the news. However, it has been over 20 years since US and European central banks had monetary policy that was opposite of one another. The last time this occurred the EU did not even exist, making the policy decisions somewhat of a wild card.
The Markit Economics Purchasing Manager's Index for the EU rose to 52.8 in November, up 0.5 from October. The biggest manufacturing gains were in Germany, which saw an increase to 52.9 from 52.1. The entire EU saw manufacturing growth, with the exception of Greece, which did see a modest improvement with contraction slowing. The Greek PMI remained below 50, but did improve to 48.1 from 47.3 in October. The jobless rate also unexpectedly fell to 10.7% in October, which is the lowest it has been in almost 4 years. The ECB has all but confirmed that it will add stimulus this month, but the exact course of action the bank will take is unknown. The ECB has a variety of tools at its disposal, including lowering interest rates, increasing asset purchases or a combination of the two.
Turning to the continuation chart, we see the Euro currency continuing to grind lower toward the 1.0500 support level. Failure to hold support here could result in a test of parity with the US Dollar. It is interesting to note that, while prices have moved lower, the RSI actually reached a relative low in the second week of November. This divergence between price and RSI may be seen as a signal that a near-term price reversal could be on the horizon. The oversold conditions, positive divergence and the market nearing a support level could be building toward a price reversal or stabilization.
Rob Kurzatkowski, Senior Commodity Analyst