Forex Trade Signals: EURUSD October-November 2018

“Politics runs the show, with economic data playing second fiddle.”

■ Market: Foreign Exchange

■ Asset: EURUSD

Currently, EURUSD shows a relatively stable outlook, but the macroeconomic environment faces political risks. The Euro must navigate emerging political and economic challenges in Italy, including rising yields on the 10-year Italian bond. Across the Atlantic, the US economy remains strong, but the US Dollar faces uncertainty ahead of the 2018 midterm elections. The market currently expects the Democrats to win the House and the Republicans to keep the Senate. Any change to this scenario could trigger significant moves in both Forex and equity markets (election results on November 7th, 2018).

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EURUSD Technical Analysis

As noted earlier, politics are driving the market right now. Still, here are some key support and resistance levels for EURUSD.

Chart: EURUSD (D1)

■ Short-Term Supply Level (Resistance):

(↑) 1.2400-1.2410 (very crucial level, determines mid-term trend)

(↑) 1.2080-1.2085

(↑) 1.1790-1.1855 (crucial price zone)

(↑) 1.1680-1.1700 (trendline, not crucial)

■ Short-Term Demand Level (Support):

(↓) 1.1300-1.1310 (crucial level)

(↓) 1.1238 (trendline, not crucial)

(↓) 1.1095-1.1100

(↓) 1.0795-1.0800

(↓) 1.0500-1.0510 (crucial level)

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EURUSD Macroeconomic Outlook

The New IMF Forecasts

In its latest “World Economic Outlook,” the IMF lowered the global growth forecast to 3.7%, down from 3.9% in April 2018. The downgrade reflects rising trade protectionism and instability in emerging markets. The IMF noted that “rising trade barriers and a reversal of capital flows to emerging market economies… have become more pronounced or have partially materialized.”

 Europe

The IMF now expects the Eurozone to grow 2.0% in 2018, down from the 2.2% forecast in July 2018. Meanwhile, Germany’s trade surplus rose to 18.3 billion euros in August 2018, beating market expectations.

The biggest challenge for the Euro right now is Italy. The yield on the 10-year Italian bond is over 3.60%, the highest in four years. Italy’s new government plans to increase spending on infrastructure and social welfare, which is negative for the Euro. There has been some pushback from Italy’s finance minister recently, but we expect the 10-year bond yield to climb to around 4.50% in the coming months.

 United States

The IMF expects the US economy to grow 2.9% in 2018, unchanged from earlier forecasts. The US unemployment rate dropped to 3.7% in September—the lowest in 49 years. Wages grew 0.3% month-over-month and 2.8% year-over-year.

US economic fundamentals remain strong. However, the 10-year Treasury yield rose sharply to a seven-year high of 3.25%, and the 30-year Treasury yield reached 3.44%. The gap between the two yields is narrowing, which may signal a transition phase for the US economy.

■ 30-Year US Treasury: 3.44%

■ 10-Year US Treasury: 3.25%

The next FED interest rate hike is expected in December 2018. Our forecast for upcoming meetings is:

■ November (8th) 2018 Meeting — No Hike

■ December (19th) 2018 Meeting — 200–250 bps (Very probable hike)

■ January (30th) 2019 Meeting — No Hike

■ March (20th) 2019 Meeting — 250–275 bps (Probable but not certain hike)

 The US 2018 Midterm Elections

The 2018 US midterm elections are approaching and could significantly impact the political landscape. Democrats generally favor trade-friendly policies and may try to block tariffs if they win. Republicans support more tariffs, lower taxes, and a stronger US Dollar.

In short, a Democratic win would likely weaken the USD, while a Republican win would strengthen it. The current market expectation is that Democrats will win the House and Republicans will keep the Senate. Any change in this scenario could cause major market moves. If Republicans lose some seats but keep the majority, the USD is expected to rise. If Democrats take both the House and Senate, the Dollar will likely fall.

Election results will be announced on November 7th, 2018, with the new Congress convening in early January 2019.

 

■ Free Forex Trading Signals: EURUSD October-November 2018

G. Protonotarios, Financial Analyst, George at Linkedin

Trading Center (October, 10th 2018)