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21 Oct 2013
Fed QE taper re-pricing: What's EUR/USD new equilibrium point?
FXstreet.com (Barcelona) - Last week we published a couple of articles by in-house Editor Ivan Delgado and TDS on the increasing likelihood that any Fed taper may not get kick-started until March 2014, an outcome which judging by the radical anti-USD move once US debt default fears were out of the way, is now being convincingly priced in by market participants.
How much room the USD has to depreciate up until year-end?
The outright sell-off on the US Dollar from Thursday was followed by failure to trim any losses, wtih G10 currencies vs USD able to maintain sizeable gains through Friday as market continues to re-asses its aspirations on a lower EUR/USD.
The strong rally in EUR/USD last week, as a proxy of market sentiment towards the USD, followed by the consolidation just below 1.3700 on Friday, is suggestive of a market accumulating buy orders as selling interest gets absorbed.
While looking for a pullback into the $1.3590-$1.3615 area to lower risk while increasing reward sounds like a sensible strategy, be aware that such negative sentiment against the USD normally means that the currency will keep falling without much retracement, thus also the increased perceived risk of leaving many traders with no chance to join the USD selling band-wagon.
If history is any indication, the projected non-taper-induced rally in EUR/USD should have another strong leg to develop. The reasoning behind is that market had found equilibrium around the 1.3370 on Sept 17 when the shocker news to 'no taper' by the Fed came about, sending the market into a 1-month consolidation between 1.3470 and 1.3600/40. Two days prior to that, the market had already been selling US Dollars as Larry Summers dropped out from the Fed Chair race.
As the delayed taper to March 2014 talk grows - Bloomberg survey to 35 economists shows expectations pushed until March 2014 too -implying a 6 months deviation (Sept to March) from last Sept 17 equilibrium point, or no less than 3 months of deviation between expected Nov/Jan last week to now March from 1.35 equilibrium price, such an error margin by the market - 3 months of re-pricing expectations until March now - should manifest in a larger move to find the new equilibrium point.
Technically, it appears as though a stronger move might also be looming in the horizon, as 1.37 seems to be the last line in the sand drawn by dishearted sellers, before the next major target in EUR/USD around the big round number 1.40 comes into focus. Whether a move higher follows today or a pullback is seen, remains to be seen, however, judging by the recent price action which saw little opposition, fear of 'missing the long trade' might actually outweigh the risks of 'buying too high.'
How much room the USD has to depreciate up until year-end?
The outright sell-off on the US Dollar from Thursday was followed by failure to trim any losses, wtih G10 currencies vs USD able to maintain sizeable gains through Friday as market continues to re-asses its aspirations on a lower EUR/USD.
The strong rally in EUR/USD last week, as a proxy of market sentiment towards the USD, followed by the consolidation just below 1.3700 on Friday, is suggestive of a market accumulating buy orders as selling interest gets absorbed.
While looking for a pullback into the $1.3590-$1.3615 area to lower risk while increasing reward sounds like a sensible strategy, be aware that such negative sentiment against the USD normally means that the currency will keep falling without much retracement, thus also the increased perceived risk of leaving many traders with no chance to join the USD selling band-wagon.
If history is any indication, the projected non-taper-induced rally in EUR/USD should have another strong leg to develop. The reasoning behind is that market had found equilibrium around the 1.3370 on Sept 17 when the shocker news to 'no taper' by the Fed came about, sending the market into a 1-month consolidation between 1.3470 and 1.3600/40. Two days prior to that, the market had already been selling US Dollars as Larry Summers dropped out from the Fed Chair race.
As the delayed taper to March 2014 talk grows - Bloomberg survey to 35 economists shows expectations pushed until March 2014 too -implying a 6 months deviation (Sept to March) from last Sept 17 equilibrium point, or no less than 3 months of deviation between expected Nov/Jan last week to now March from 1.35 equilibrium price, such an error margin by the market - 3 months of re-pricing expectations until March now - should manifest in a larger move to find the new equilibrium point.
Technically, it appears as though a stronger move might also be looming in the horizon, as 1.37 seems to be the last line in the sand drawn by dishearted sellers, before the next major target in EUR/USD around the big round number 1.40 comes into focus. Whether a move higher follows today or a pullback is seen, remains to be seen, however, judging by the recent price action which saw little opposition, fear of 'missing the long trade' might actually outweigh the risks of 'buying too high.'