Euro seen snapping advance on Fed tapering bets

Hamper Exports

A stronger currency may hamper the euro area’s exports and threaten the economy. Overseas shipments rose a seasonally adjusted 3% in June from May, when they dropped 2.6%.

ECB Governing Council Member Ewald Nowotny said that the recent “stream of good news” from the euro-region economy has removed any need to cut interest rates from a record-low 0.5%, while ruling out an early end to monetary tightening, according to an Aug. 22 Bloomberg Television interview from Jackson Hole, Wyoming.

Bank of Cyprus Governor Panicos Demetriades, also a member of the ECB governing council, said on Aug. 24 that policy makers can’t “rule out” lowering borrowing costs.

That contrasts with the Fed’s position, which next month may start scaling back bond purchases that have helped keep a lid on dollar strength. Minutes of the Federal Open Market Committee meeting published Aug. 21 showed that most members were “broadly comfortable” with the plan to trim stimulus in 2013.

MACD Signal

“Markets are moving ahead of central-bank forward guidance at the moment,” Chris Weston, the chief market strategist at IG Markets Ltd. in Melbourne, said in an Aug. 23 phone interview. “If we get the euro above $1.35, you’re going to start seeing a lot more verbal intervention.”

The moving average convergence-divergence, or MACD, is a gauge of momentum and is calculated by subtracting the 26-day exponential moving average from the 12-day average. The signal line is a nine-day exponential moving average of the MACD, and provides buy and sell signals.

The euro rose above the upper limit of its 20-day Bollinger band on Aug. 20 and stayed close to this indicator through the end of last week. The measure, developed by John Bollinger in the 1980s, is used by technical analysts to identify the turning point in an asset’s trajectory.

Options traders are the most bearish on the euro versus the dollar in seven weeks, according to a technical measure known as 25-delta risk reversals. The premium on three-month options granting the right to sell the shared currency compared with those allowing for purchases was at 1.49 percentage points today. It increased to 1.52 percentage points on Aug. 22, the most since July 5 and up from 0.98 percentage point on July 23, data compiled by Bloomberg show.

“The euro’s failed attempts at the $1.34 level that we’ve seen this week set the scene for a move back toward the bottom end of the recent range,” or about $1.32, Mike Jones, a Wellington-based currency strategist at Bank of New Zealand Ltd., said in an Aug. 23 phone interview.

“If we get confirmation that Fed tapering is happening in September, I suspect that will be the missing ingredient for euro weakness, and we’ll see that downtrend kick off,” said Jones, who sees the currency plunging to $1.28 by year-end.

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