EURUSD Trade Idea

EURUSD is currently trading at 1.0880 steadily climbing for 83 trading days off lows of 0.9534 in Sep 2022 shortly after the peak in natural gas prices and a peak in trade deficit . A steady run of 14.60%.

Look at how Euro Area trade deficit worsened in the aftermath of the Russia - Ukraine war.

Do we see an opportunity to sell into the rally yet?

Let's look at two aspects here -

1. What are the interest rates telling you?

Key ECB Rates

Deposit facility 2.00 %

Main refinancing operations 2.50 %

Marginal lending facility 2.75 %

Market implied interest rates are pricing in a peak terminal rate of 3.5%. Next 5 policy meeting dates are 02 Feb 23 / 16 Mar 23 / 04 May 23 / 15 Jun 23 and 27 Jul 23 where in the market has priced in 50 bps for the next 2 policy meetings and another 50 bps in the next 3 meetings.

Comments yesterday from ECB Chief Christine Lagarde reiterated that rates have to significantly rise at a steady pace . "Inflation in Europe is far too high, partly due to our vulnerability to the changing geopolitics of energy. But while energy inflation has been coming down recently, underlying inflation continues to rise. As a result, it is vital that inflation rates above the ECBs 2% target do not become entrenched in the economy."

The chart below shows headline and core CPI inflation along with prices of natural gas.

Interest rate differentials are key to currency moves. The current peak rate pricing in both EUR (3.50%) and USD (4.90% - 5.00%) continues to be stable and hence we do not have a catalyst to drive price higher or lower here.

There is a pending issue of oil products sanctions come Feb. 5, the European Union will join the UK and the US in banning seaborne imports of Russian diesel and other oil products. If European buyers are unable to find alternative supplies, the sanctions would affect the terms of trade and weigh on EUR.

2. What are important levels technically?

EURUSD faces key resistance at 1.0950 (R1) and then 1.1140 - 1.1185 (R2). Any moves into R1 in early part of April were sold into. The latter level is a more crucial resistance as after taking support in early 2022, the level broke and the bounce to this zone was aggressively sold into. So both these levels are crucial.

I would like to sell into R1 with a tight stop loss above 1.1000 for a move towards 1.0600.

Comments

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