Euro strengthens on Draghi’s hint at slashing stimulus

The victory of Emmanuel Macron in the French election and the narrowed spread between the French and German government bond strengthened the Euro against the Aussie. From a low of 1.4800, the currency cross has rallied to a high of 1.5050. We anticipate another round of upswing in the EUR/AUD pair, which is currently trading at 1.4910 levels, due to the facts mentioned below.

For the past few months, traders were speculating the possibility of tapering the bond purchases by the ECB, as there were concrete signs of economic recovery in the Euro zone.

On Tuesday, while speaking at the European Central Bank Forum in Sintra, ECB’s President Mario Draghi gave a subtle hint of trimming down the bond purchases in the coming months. Draghi stated that the Eurozone still needs the stimulus, but not to the extent of what it was earlier. A rise in the interest rates would make the Euro attractive to investors.

European Central Bank

Commenting on Draghi’s statement, Marco Valli, an analyst at UniCredit Bank AG, stated that the conditions are ripe for tapering of bond purchases in the September meeting. UniCredit believes that the ECB would slow down the bond purchases on a step by step basis, with the entire stimulus program drawing to a close by the end of next year. Draghi’s speech is expected to keep the Euro bullish in the medium-term.

The Australian dollar derives its strength mainly from the price of top three export commodities such as iron ore, coking coal, and natural gas. The price of iron ore has nearly halved to about $54 per ton, compared with $95 in February. Considering the rout, Morgan Stanley has slashed its price outlook for iron ore. The global investment research firm is forecasting a price of $50 per ton in the third quarter, down 23% from the prior estimate. For the last quarter of 2017, Morgan Stanley expects iron ore to trade at about $55 per ton – a 15% reduction from the earlier estimate.

Similarly, coking coal, one of the prime ingredients used by steel mills, has fallen to a one year low of $139 per ton. Last year, the price touched a high of $330 per ton. Even the July futures of natural gas are trading below $3 per MMBTu as the summer heat is expected to begin only in the second week of July in the US. Thus, fundamentals favour a rally in the EUR/AUD pair.

Technically, the EUR/AUD pair has support at 1.4880. The momentum is making new highs. Thus, we expect the EUR/AUD pair to remain bullish. On the upside, resistance exists at 1.5170.

In the currency market, we wish to open a long position in the EUR/AUD pair near 1.4910, with a stop loss order below 1.4780. If the Euro strengthens as forecasted, then we wish to book our profit near 1.5170.

Similarly, in the binary market, we are looking at the prospects of investing in a call option valid for seven trading days. We would target our entry near 1.4910.

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