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Euro strengthens as economy shows signs of recovery

The Fed’s outlook of three rate hikes this year considerably eroded the prominence of the New Zealand dollar as a ‘carry trade’ currency. This was the prime reason for the Euro, which buckled against the Greenback, to gain ground against the New Zealand dollar. Within a week after the Fed rate hike was announced, the EUR/NZD pair had gained nearly 400 pips to reach a high of 1.5174.

However, the failure of Italy’s Monte dei Paschi di Siena bank to raise the much needed funding caused the Euro to tremble against the Kiwi dollar. After declining to a low of 1.5011 on December 29th , the EUR/NZD pair spiked sharply to 1.5230.

The unexpected spike was attributed to algorithmic trading. The EUR/NZD pair cooled down eventually to 1.5050 levels. Now, there are valid reasons to believe that the EUR/NZD pair is consolidating to begin an uptrend in the short-term.

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The recent Commitment of Traders (COT) report from the US Commodity Futures & Trading Commission (CFTC) indicates that funds have considerably reduced their short positions in the Euro, since November. So, considering the divergence between the speculators’ position and the movement of the Euro, we can definitely argue that there exists a higher probability of a bullish reversal in the EUR/NZD pair is higher.

Another important reason for the Euro to decline last month was the concern over the possible rise of anti-EU parties in the elections scheduled to take place later this year. Netherlands (Mar), France (Apr/May), Germany (Oct), and Italy are the key EU members which are going to polls later this year. A recent assessment of the political risk indicates that the market has indeed overreacted and the probability of rise of anti-EU parties to the centre stage is quite less.

In the past few months, the Euro zone has been showing some signs of recovery. The unemployment rate has decreased to a seven year low of 9.8% as of October. The inflation rate has increased marginally. In particular, the German inflation rate hit a three year high. Furthermore, the Euro zone posted a small but positive economic growth of 0.3% in the third-quarter. The Euro zone is now anticipated to grow 1.6% y-o-y in 2017.

The optimism about the growth is also evident from the ECB’s recent announcement to reduce the size of its QE program.

As mentioned earlier, the attractiveness of the Kiwi dollar as a ‘carry trade’ currency has decreased, following the announcement of a rate hike by the US Fed. Moreover, analysts are concerned about the negative impact of Trump’s protectionist policies on the export sector of New Zealand. Thus, based on the above details, we have a short-term bullish view of the EUR/NZD pair.

The price chart shows that the EUR/NZD pair has bounced off the support at 1.5048. The positive reading of the MACD indicator confirms bullishness in the currency pair.

EUR/NZD Pair: January 9th 2017

EUR/NZD Pair: January 9th 2017

Thus, a Forex trader should open a long trade between 1.5090 and 1.5110 to take advantage of the probable uptrend of the EUR/NZD pair. To reduce speculation related risk, a trader should place stop loss order below 1.5020. The long position can be diluted at about 1.5230.

Likewise, a high or above contract should be the most suitable one to trade as far as a binary trader is concerned. The entry can be done when the EUR/NZD pair trades below 1.5120. The trader should ideally choose Jan 17th as the expiry date of the contract.

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