The EUR/USD climbed to a1.0651 on Friday, but retreated immediately near 1.0500 . We used this jump to get short at 1.0590, in line with our trading idea. The shift came in the period at the start of the Asian day when markets were at their thinnest and the bulk of liquidity available tends to come from the automated computer programmes run by banks and other major houses.
Further gains for the dollar are one of the big consensus plays for investors going into 2017. The market has taken the view recently that Donald Trump’s promised policies, such as sizeable fiscal stimulus will be a boon for the dollar.
Fundamentally, our problem with this line of reasoning is as follows - the US economy is currently operating at near full capacity, which implies that substantial fiscal stimulus (lacking the ingredients to improve productivity) is likely to compress US real rates further via higher inflation. In fact, over the past 40 years or so, material fiscal expansions (more than 1.5% of GDP on an annual basis) when the economy’s output gap was similar to what it is now (between 0% and -2%) have been broadly associated with lower real rates and meaningful USD depreciation over the subsequent year.
However, it is an undisputable truth that markets have become very excited in bidding the USD higher. The price momentum has grown so swiftly and strongly that being bearish the USD feels like standing in front of a runaway train. Technically, the trade-weighted index is now hovering around multiyear highs and a convincing break above these levels would only add fuel to the fire.
We lowered the stop-loss on our short EUR/USD to the entry level (1.0590). The EUR/USD may be under pressure in the short term. But there is a risk of recovery in the medium term, as we expect a rapid rise in Eurozone inflation and this may inspire discussion on ECB tapering.
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Further gains for the dollar are one of the big consensus plays for investors going into 2017. The market has taken the view recently that Donald Trump’s promised policies, such as sizeable fiscal stimulus will be a boon for the dollar.
Fundamentally, our problem with this line of reasoning is as follows - the US economy is currently operating at near full capacity, which implies that substantial fiscal stimulus (lacking the ingredients to improve productivity) is likely to compress US real rates further via higher inflation. In fact, over the past 40 years or so, material fiscal expansions (more than 1.5% of GDP on an annual basis) when the economy’s output gap was similar to what it is now (between 0% and -2%) have been broadly associated with lower real rates and meaningful USD depreciation over the subsequent year.
However, it is an undisputable truth that markets have become very excited in bidding the USD higher. The price momentum has grown so swiftly and strongly that being bearish the USD feels like standing in front of a runaway train. Technically, the trade-weighted index is now hovering around multiyear highs and a convincing break above these levels would only add fuel to the fire.
We lowered the stop-loss on our short EUR/USD to the entry level (1.0590). The EUR/USD may be under pressure in the short term. But there is a risk of recovery in the medium term, as we expect a rapid rise in Eurozone inflation and this may inspire discussion on ECB tapering.
GrowthAces.com - Daily Forex Trading Strategies
Sign up for annual subscription with 30% discount!