Euro Bets on Stock Indices

The main currency pair has highlighted the limitations of the medium-term trading and will not leave it until the new driver is just around the corner. This can make the EUR/USD pair break above 1 188? Most likely, a sharp acceleration in European inflation, which will force the ECB to make adjustments to its monetary policy. Judging by the slowdown of the CPI in the euro area from 1.5% to 1.4% in October, the likelihood of the implementation of such a scenario is not very high. Even taking into account the delayed effect of the increase in the price of Brent above $ 60 / barrel, we can expect inflation to accelerate only in the first half of 2018.

On the other hand, the dollar did not have a lot of drivers break support at 1.1575. The futures market is almost certain that the Fed will raise the federal funds rate to 1.5% in December, and that it is not in a hurry to discard the probability of a more aggressive form of monetary tightening by the u.s. Central Bank by 2018 in the price of the dollar in pairs. Passing of the tax reform in the framework of the Congress, threatens to drag on, which will weaken the position of the «bears» in the EUR/USD pair.

The two economies are very good, the divergence of monetary policy has decided to take a break (at least until the end of 2017), the political risk, after a favourable opinion to the resolution of the conflict over Catalonia are at around the same level. Therefore, the main engine of the evolution of prices of major currency pairs are the flow of capital on stock markets in the united states and the euro area. Following the ECB’s decision to extend the implementation of its programme of quantitative easing, at least until the end of the month of September of the next year, the potential of the European indices appears more.

First of all, the policy of easy money in the euro area can rely on the flow of Central Bank liquidity. Let the scale of QE to be reduced from 60 to 30 billion euros per month, but taking into account the reinvestment of income from cancelled obligations (around 10 to 15 billion euros), the amount is still high. Activity in the manufacturing sector of the euro area in October, has reached its peak recordings from 2000, which allows us to rely on the maintenance of a positive dynamic in the GDP movement. The debt market rates remain ultra-low, and the gradual stabilisation of the euro exchange rate will improve the financial results of the enterprises.

The dynamics of the S&P 500 index and the central bank balances

Source: Goldman Sachs.

Therefore, the flow of capital to the European equities market, which has become one of the main engines of growth of the pair EUR/USD following the victory of Emmanuel Macron to the presidential election in France, we remind you. Great importance will be whether the non-residents provide the foreign exchange risks? I believe that if the euro was worth $1.2, the answer to this question is positive. Another point is the trading range 1,1575-1 188. Within its limits, the probability of a hedge is not so great, which is a «bullish» factor for the major currency pairs.

Technically, the breakthrough of the support at 1.16 will increase the risk of the implementation of the target points, 161.8%, and 200% on the AB = CD pattern. On the contrary, the breakthrough of the resistance of 1 168-1 169 will instill in the bulls, a hope for the growth in the price of the EUR/USD pair to the upper limit of the downward trading channel.

The EUR/USD, daily chart

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