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Dollar Defies Strong EU Data As Rate Hike Expectations Dominate – Put Options Suggested on EURUSD -

Oct, 11th 12:57

The Euro has been collapsing against the U.S dollar since the start of this week. Even though the ZEW Centre for Economic Research reported stronger-than-expected economic data readings in both the EU and Germany, the positive outlook for the EU economy failed to overcome the pro dollar sentiment, resulting from expectations of a rate hike in the US.

According to the ZEW Survey, the gauge for German economic sentiment improved more than expected in October. The index rose to 6.2 this month from September’s reading of 0.5, beating analysts’ forecast for an increase to 4.3. With a level above 0.0 indicating optimism, ZEW president professor Achim Wambach commented that the figure reflected relatively robust economic activity in Germany. However, Wambach also warned about risks within the country’s banking sector, referring to the case of Deutsche Bank and the investigation into its selling of mortgage-backed securities ahead of the Financial Crisis in 2008.


The survey further reported that the composite index for the entire EU increased to 12.3 in October from 5.4 a month earlier. Consensus forecasts had expected a rise to 6.3. The positive results in the European data released today, have not been not spur fresh demand for the single currency so far today. However, the U.S dollar has continued to strengthen as the Federal Reserve is widely expected to make a move on benchmark interest rates this December.

EURUSD hit an intra-day low at 1.10707 – a level last seen on August 9th, after comments from Fed officials reinforcing the case for a rate hike sooner rather than later. Echoing the comments from his colleagues over the past week, Chicago Fed President Charles Evans said that the NFP reading on Friday was a “pretty good number”. Evans further stated that he was fine with a rate increase by the end of this year, but more evidence on the strength of the economy, and especially inflation making progress, were necessary before deciding conclusively.

Yields on 10 year US bonds consequently rose to a four-month high on Tuesday as traders returned to the markets after the Columbus Day holiday yesterday. As a result of soaring U.S debt yields, more foreign investors entered the US Treasury market and pushed up demand for the currency.


Fig: EURUSD D1 Technical Chart

EURUD has fallen out of the narrowing trading range that has been in formation since late 2015. The market has breached the lower boundary of the range and is now heading downwards to the 50.0% retracement level at 1.10570. The DMA20 has penetrated the DMA50 from above, suggesting further declines for the pair. The price action has broken through both the MA’s as well and both MA’s are now placed above the price action. The RSI index has dropped to as low as 38.73, retreating alongwithe with the stochastic lines, thus providing strong confirmation for the current down-move

Trade suggestion

Buy Put Option from 1.10780 to 1.10500 valid until 20:00 GMT October 11, 2016

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