EUR/USD gains on Catalonia relief
Macroeconomic overview:
- In a much-anticipated speech to the Catalan parliament late on Tuesday, regional leader Carles Puigdemont made only a symbolic declaration of independence, calling for talks with Madrid in a gesture that eased fears of immediate unrest in the heart of the euro zone. Spanish Foreign Minister Alfonso Dastis said today that there was room for negotiations within the framework the country's existing constitution.
- Dallas Federal Reserve Bank President Robert Kaplan said he wants to see more signs of upward inflation before raising interest rates again, but that low long-term borrowing costs may limit how far and fast rates can be raised. Kaplan, who votes this year on Fed policy, appeared to be wrestling with how to balance the costs of leaving rates low against the potential dangers of raising rates too fast. He repeated his concern that globalization and technology are keeping inflation muted, despite unemployment that sank in September to 4.2%. While near-full employment is putting some upward pressure on inflation, he said on Wednesday, those secular forces are acting as headwinds.
- Investors were awaiting the release of minutes of the September Federal Reserve policy meeting later in the session. The Fed had signalled at the meeting that it may raise interest rates for a third time this year even with inflation staying below its 2% goal, so we should expect minute to be hawkish. But with the Fed funds futures almost fully pricing in the likelihood of a rate hike in December and the recent spike in Treasury yields losing momentum, hawkish minutes could be not enough for the dollar to renew its advance. We think that U.S. CPI data on Friday will play more important role.
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Technical analysis and trading signals:
- The EUR/USD continues to rise and broke above 14-day exponential moving average today. The Ichi cloud top at 1.1894 is the nearest EUR/USD bulls’ target. The pair will have to break above 23.6% fibo of June-September rise, which is a resistance level now at 1.1862.
- We stay long for 1.2400.
- We are waiting for Friday’s U.S. CPI data – if we do not see renewed USD strength we will raise our trailing stop-loss and recommend increasing the position size.
