Forex Trade Signals: EURUSD October-November 2018

“Politics run the show, economic data playing second fiddle”

■ Market: Foreign Exchange

■ Asset: EURUSD

Currently, we are witnessing a relatively stable outlook for EURUSD, but the macroeconomic environment is prone to political pitfalls. Euro has to deal with the emerging political and economic risks in Italy, and the advancing yield of the 10-year Italian Bond. On the other side of the Atlantic, the US economy is still very strong. However, the US Dollar has to deal with the US 2018 midterm elections. The scenario that is priced today is that the Democrats will win the house, and the Republicans will win the Senate. Any deviation from this basic scenario may trigger significant price movements in both Forex and equity markets (Results on November 7th, 2018).

EURUSD Technical Analysis

As mentioned in the beginning, politics run the show at this moment. Nevertheless, these are some key support/resistance price 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)

EURUSD Outlook

The New IMF Forecasts

In the release of its “World Economic Outlook”, IMF lowered the global growth outlook to 3.7%, from its April 2018 estimate of 3.9%. The downgrade is due to increased trade protectionism and instability in emerging markets. The IMF said “rising trade barriers and a reversal of capital flows to emerging market economies… have become more pronounced or have partially materialized”.

Europe

The IMF expects Eurozone to grow 2.0% in 2018, down from its 2.2% estimate in July 2018. Meanwhile, the German trade surplus rose to 18.3 billion euros in August 2018, exceeding the market forecast.

At this moment, the major problem for the Euro is called Italy. The yield of the 10-year Italian bond is over 3.60%, the highest level of the last four years. Italy’s new government wants to increase spending on infrastructure and social welfare, and that is bad news for the European currency. Note that lately, there was a pushback from Italy's finance minister. We should expect the yield of the 10-year Italian Bond to reach even 4.50% in the following months.

United States

The IMF expects the US economy to grow 2.90% in 2018, unchanged from its earlier forecasts. The US unemployment rate fell in September to 3.7%, the lowest rate in 49 years. US wages grew by 0.30% MoM and by 2.80% YoY.

The fundamentals of the US economy are still strong. However, the 10-year US Treasury yield advanced aggressively to a 7-year high, at 3.25%. At the same time, the 30-year treasury advanced at 3.44%. The gap between the yields of the two treasuries is shrinking, and that maybe means the US economy enters a stage of transition.

■ 30-Year US Treasury: 3.44%

■ 10-Year US Treasury: 3.25%

The next FED interest rate hike is expected in December 2018. This is our basic forecast for the following months:

■ 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 US 2018 midterm elections are approaching and can have a significant impact on the United States political landscape. Democrats are more trade-friendly, and if they win, they will try to block trade tariffs. On the other hand, Republicans favor more tariffs, lower taxes, and a stronger US Dollar.

At a glance: a Democrat victory will have a USD-negative impact, and a Republican victory a USD-positive impact. The scenario that is priced today is that the Democrats will win the house, and the Republicans will win the Senate. Any deviation may trigger significant price movements. The level of impact in the Forex market depends on the outcome. If the Republicans lose some seats but maintain the majority, the USD is expected to soar. On the other hand, if the Democrats win both the House and the Senate, the Dollar will tank.

The results will be known on November 7th, 2018 and the new Congress will convene in early January 2019.

 

■ Free Forex Trading Signals: EURUSD October-November 2018

G. Protonotarios, Financial Analyst, George at Linkedin

Trading Center (October, 10th 2018)