EURUSD continues to perplex analysts who see rate differentials as the main driver of forex rates. At more than 250 basis points, the spread between US and German two-year bond yields is at its highest level since the euro made its debut in 1999. Perhaps the markets are anticipating the spread will narrow significantly when the European Central Bank takes its foot off the quantitative easing accelerator later this year.
But for that to come to pass, we will need to see positive developments in the inflation space. So Friday’s flash estimate for December could be key for EURUSD. Expectations are low, for the core rate accross the Eurozone to come in at 0.9% year-on-year, with no improvement over the previous update. So anything better than this should give the euro a boost.
Later on Friday, we will see the US employment report for December. Forecasts are for a jobs added number around 190,000; unemployment to drop marginally to 4% and average hourly earnings to rise 2.5% on an annual basis.
Heading into this key data point, Fed funds futures are pricing in a 68% chance of a March rate hike.
Management and risk description
From an Elliott Wave perspective, the euro is undergoing a probable 5-Wave sequence from last November’s low of 1.1555 (which is valid while it holds above the 1.1900 level), for an advance toward potential targets of 1.2345 and 1.2630 (refer Daily chart below).
In the short term, support is today found at 1.2000/1.1970, for the next rally onto the mid 1.2100s.
Entry: Today Only: EURUSD is seen as a buy at 1.2010/1.1985.
Stop: 50% below 1.1965 and 50% below 1.1920 (all initially, only).
Target: 50% at 1.2148 and 50% at 1.2344.
Time horizon: allow a few days for first target to be met .
Daily EURUSD chart (click to expand)
Weekly EURUSD chart (click to expand)
– Edited by Robert Ryan
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