The Euro-to-Dollar rate recovers to two-week highs, but can the recovery push back above 1.20 or might political uncertainty push the Euro back down again?
The EUR/USD has recovered after tensions in Catalonia eased and the US Dollar was harassed by more in-fighting in Washington.
The Euro rose on Wednesday morning to highs of 1.1845 vs. the US Dollar as the rally from last week's 1.1670 lows stretched higher.
Although the pair has come off its highs since it remains in the 1.18s and is currently trading at 1.1819.
Technical analysts, who monitor charts, are mixed in their assessments of the outlook for the pair, with some expecting a resumption of the previous Euro rally and move above 1.20 and others seeing the potential for a much deeper breakdown into sub-1.16 territory.
The president of the Catalan regional government, Carles Puigdemont, has said that the October 1 referendum has given the Catalan government a 'mandate' to pursue independence, but not immediately.
This has defused concerns he might announce a unilateral independence which would have put him at loggerheads with Madrid again.
The Spanish PM Mariano Rajoy has since responded to the move by simply requesting further clarification. "With all the force of a wet noodle, Catalonia’s presumed declaration of independence was instead a weak climbdown – prompting a rally of the Euro up to around 1.185 USD," says Peter Rosenstreich at Swissquote Bank.
The question being asked is whether Rajoy will meet the Catalans halfway and allow them a legal referendum on independence.
He is unlikely to sound compliant, according to London Capital Group's Senior Market Analyst, Ipek Ozkardeskaya.
"From a Spanish perspective, it is a fact that the Catalan government crossed the line by running a referendum that Spain qualified as illegal. Rajoy’s tone will matter. A strong opposition could escalate the crisis," said the analyst.
"The euro’s relief recovery may be halted by PM Rajoy's speech on Catalan crisis. The first resistance against the US dollar is eyed at the 50-day moving average (1.1858)," added Ozkardeskaya setting out a near-term target for the Euro's rally.
Société Générale's Chief Global FX Strategist Kit Juckes characterises the Catalan affair as a "damp squib" for currency markets saying:
"The question, as negotiations start over Catalonia's future status, is whether this means the EUR/USD correction, from the high on 8 September to last Friday's low, is over."
But Rosenstreich suggests strength might soon relent saying, "still there is uncertainty about Spain’s unity, and the Euro might slide back in the near term toward 1.1700, but the European Union has stepped forward toward unity."
For EUR/USD, much depends on the Dollar.
Today's EUR/USD whipsaw higher was also due to a weakening Dollar which happened as a result of a social media quarrel between Donald Trump and Senator Bob Corker.
The senator criticised the president for putting the US on a path to World War III due to his inflammatory remarks.
It is feared that the feud may result in the Senator voting against Trump's tax reforms which due to the Republican's marginal Senate majority could mean they fail.
"Divisions within the Republicans seems to be a similar story to the healthcare bill and controversies could result in more disappointment for the Trump’s administration," said SocGen's Juckes
However, when asked whether he thought his spat with Corker would jeopardise the voting through of tax cuts Trump - not surprisingly perhaps - said he did not think it would.
For Juckes the key for the Dollar lies in the minutes of the last FOMC meeting, released tonight at 19.00 BST.
"The key in the short-run is whether the minutes lead to more hawkishness and higher yields or not?" Says Juckes.
"Today’s FOMC Minutes and Friday’s (weather-distorted) US CPI and retail sales will tell us more but in the interim, I’m watching chart levels along with everyone else," he concludes.
ING Bank N.V's FX Strategist Viraj Patel, meanwhile, is skeptical that the minutes will push up rates and consequently the Dollar.
"It would be remiss not to mention the Sep FOMC minutes today (1900 BST), but for some time now our motto has been that the Fed remains merely a subplot for the USD. If anything, the minutes will show the current dichotomy within the Fed on big-picture issues related to the US economy. Such mixed messages are why we think markets will remain sceptical over pricing in a steeper US rate curve," says Patel.
Indeed ING's Dollar-negative view combined with their expectation that the Catalan issue will have a trivial impact on the Euro leads them to make the bold forecasts of a two-week rally for the currency.
Ultimately they see the Catalan affair dwarfed by more bullish drivers based on an assessment of the strength of the recovery in the Euro-area and the European Central Bank's (ECB) plans to taper stimulus.
They expect the Euro to start rallying in the two weeks before the ECB's October meeting when they will cut QE from 60bn to 20-25bn.
"Certainly our house view for a drop to EUR 20-25bn monthly QE purchases from Jan-18 (albeit for slightly longer) could see a one-off move higher in EUR pairs. We like long EUR against the USD (s/t target 1.20), JPY (135) & CHF (1.17)," said Patel.
Potential for Break Higher
A technical analysis of the EUR/USD chart by SocGen's Stephanie Aymes is quite bullish after it highlights the exchange rates current push against the upper boundary of an hourly downsloping channel which has encompassed price activity since the roll-over from the September highs.
"EUR/USD is now testing the upper bond of the hourly channel that it has been in this correction. A break of 1.1880 would threaten the idea of a pull-back to 1.16," says Juckes.
Indeed, in our opinion, it appears that even an earlier break, perhaps above the current 1.1845 highs, might be sufficient to signal a bullish breakout out of the channel to the upside.
Such a break would be expected to move an equal distance to the height of the channel, which suggests a roughly 175 point rise to at least 1.2000, if not higher around 1.2020.
Commerzbank is less bullish technically and would want a move back above 1.20 to reinvigorate a bullish stance.
"Intraday rallies have so far been relatively tepid," says Commerzbank's Karen Jones.
She highlights resistance at 1.1833 end of September high and the 1.1831/38 20 and 55-day moving averages.
She prefers a downside bet, saying, "We would treat a break below 1.1660 as the trigger for a sell-off to the mid-June high at 1.1296 and the more important 1.1110 end of May low."
50-day MA Guarding
We also note tough resistance at the current highs from the 50-day moving average and would want to see a break clearly above it before expecting a continuation higher.
Such a break would come from a rebreak above the 1.1850 level, with an upside target of 1.2000.
We think there are many bullish signs on the chart which support a resumption although the 50-day is an important barrier which must be crossed first.
For example, the rally over recent days has surpassed the October 4 and September 29 peaks and has probably reversed the downward sequence of peaks and troughs, which is a bullish sign in itself.
The MACD has completed an abcd pattern which also augurs more upside for momentum, and the MACD is also crossing its signal line in a further bullish sign.
It is not our base case but we also acknowledge the possibility that a break below the October 6 low would continue the down trend down to 1.1600 initially.