Euro Holds Ground as Asset Allocations Unfold Ahead of the Fed. Can EUR/USD Rally?

[MongiIG]

EURO, EUR/USD, ASSET ALLOCATION,FED, CRUDE OIL, PMI - TALKING POINTS

• The Euro has an ascending trend line vs. USD despite US rate hikes looming
• Equity to bond rotation could be happening as the cycle may have peaked
• All eyes will be on the Fed later this week. Will EUR/USD move higher?

The Euro has continued to consolidate to start the week as markets digest Friday’s price action and contemplate the possible outcomes of the Fed’s FOMC meeting this week.

The VIX, a measure of equity market volatility, traded at its highest level since early December on Friday.

Overall, the first few weeks of 2022 have seen most global equity indices move lower and government bond yields go higher.

However, this changed going into the end of last week and from a global macro perspective, it might be a significant signal of an underlying shift in markets.

Two things to note. Firstly, the move got going in the Asian session on Friday. Secondly, bond yields went down at the same time that equities were sinking.

US Treasury yields are the bellwether for global government bonds and by extension, global interest rates. Most of the volume in this market is seen in the North American session, for obvious reasons.

The fact that this market got moving in Asia could be indicative of notable portfolio adjustments going through. When large money managers (real money and hedge funds) need to make a significant shift to the tilt in their portfolios, it can take several days or longer to complete, due to liquidity constraints.

When these large orders are being managed, they are often handed over to night desks to continue executing. They usually have explicit instructions for how to trade should prices start moving.

On Friday, when equities were being sold, bonds were being bought (leading to lower yields). This is a classic cyclical asset allocation decision to switch out of risk assets (like equities) into defensive ones (like bonds). Active diversified portfolio managers do this to try to add “alpha”, that is, to boost returns relative to a benchmark of overall market performance (or “beta”).

The moves into the weekend have all the hallmarks of such a change in portfolio construction. If that is the case, other money managers might start making similar adjustments. The week ahead may tell us more of this shift in market sentiment.

Most APAC equities were lower to start the week, with the exception of mainland Chinese indices. They were boosted by the PBOC cutting the 14-day reverse repo rate by 10 basis points to 2.35%.

Data released today saw Australian and Japanese composite and services PMI numbers below 50, implying contraction of economic activity. Manufacturing PMI for both countries were firmer.

10-year Treasuries are near 1.77%, while US equity futures are pointing toward a positive start to the cash session after the opening bell on Wall Street.

Bitcoin is down almost 50% from its’ November high today, while G-10 currencies have had a relatively quiet start to the week.

Crude oil continued to recover lost ground, trading above $86/bbl today, and other energy commodities were also higher. Gold is flat on the day while other metals are a bit softer.

After the European PMI numbers today, the US will also see its version of the surveys cross the wires, but the market will remain focused on the Fed meeting later in the week.

 

EUR/USD TECHNICAL ANALYSIS

EUR/USD has continued to consolidate in an ascending trend channel since it made an 18-month low in November last year.

This consolidation has seen the short and medium-term simple moving averages (SMA) begin to cluster around the price. A significant divergence away from these SMAs may signal the beginning of a trend.

Support could be found at the previous lows of 1.12738, 1.12347, 1.12219 and 1.11861.

On the topside, resistance might be offered at the pivot point of 1.13830 or the recent high of 1.14830.

Chart created in TradingView

 

Written by Daniel McCarthy, Strategist for DailyFX.com. 24th Jan 2022.