Forex Market: EUR/USD daily trading outlook

Yesterday’s trade saw EUR/USD within the range of 1.0561-1.0637. The pair closed at 1.0626, going up 0.59% on a daily basis. It has been the first gain in the past five trading days. The daily high was a lower-high test of the high from November 27th.

According to Binary Tribunes analysis on historical volatility, the average intraday volatility for the pair was 0.838% in November, or the lowest since December 2014, when average volatility was estimated at 0.696%. At the same time, the average daily volatility for EUR/USD was 0.657% in November, or the lowest since December 2014. Back then the average daily volatility was estimated at 0.600%.

At 7:24 GMT today EUR/USD was losing 0.18% for the day to trade at 1.0615. The pair touched a daily low at 1.0608 at 7:00 GMT, undershooting the range support level (S3). The area 1.0605-1.0610 acted as support for the pair in the past one hour of trading.

Today EUR/USD trading may be influenced by a number of macroeconomic reports and other events as listed below.

Fundamentals

Euro area

Consumer inflation – preliminary estimate

The preliminary annualized consumer inflation in the Euro zone, evaluated in accordance with Eurostat’s harmonized methodology, probably accelerated to 0.2% in November, according to the median estimate by experts, from a final rate of 0.1% in October. If so, this would be the highest annual inflation since July, when a final rate of 0.2% was reported.

The largest upward pressures to impact the regions annual inflation in October were recorded for categories such as vegetables (up 0.14 percentage points), restaurants and cafés (up 0.10 percentage points) and fruit (up 0.07 percentage points).

At the same time, the largest downward pressure came from categories such as fuels for transport (-0.68 percentage points), heating oil (-0.22 percentage points) and gas (-0.09 percentage points), according to the report by Eurostat.

In case the HICP performance met expectations or went further into positive territory, thus, approaching the 2% inflation objective set by the ECB, this would cause a strong bullish impact on the euro, as it suggests monetary policy accommodation has begun to work in favor of macroeconomic activity in the region.

The preliminary annualized Core HICP probably increased at a rate of 1.1% in November, matching the final rate, reported in October. It has been the highest annual core inflation since August 2013. This index excludes volatile categories such as food, energy, alcohol and tobacco. Eurostat is scheduled to release the preliminary inflation report at 10:00 GMT.

Producer prices

The annualized index of producer prices (PPI) probably fell 3.2% in October, according to market expectations, following a 3.1% decline in September. If so, October would be the 27th consecutive month, when annual producer prices slumped and also the steepest annual drop since November 2010, when the PPI fell 4.4%. The Producer Price Index measures changes in prices of goods and services either as they leave the production process, or as they enter it. Unlike the CPI, which measures price changes from the consumers perspective, the PPI gauges the prices received by domestic producers for their output, or the prices paid by domestic producers for their intermediate inputs. The PPI performance may be used as an early signal for inflationary pressure in economy. Generally speaking, a worse-than-expected PPI performance may have a limited bearish effect on the common currency, as it suggests stagnation in consumer prices, while a better-than-expected performance may have a limited bullish effect. Eurostat is to release the official report at 10:00 GMT.

United States

Change in employment by the ADP

Employers in the US non-farm private sector probably added 190 000 new jobs during November, according to the median estimate by experts, following 182 000 new positions added in October. The latter has been the smallest gain in jobs since April 2015, when 169 000 positions were added. The employment report by Automated Data Processing Inc. (ADP) is based on data that encompasses 400 000 – 500 000 companies employing over 24 million people, working in the 19 major sectors of the economy. The ADP employment change indicator is calculated in accordance with the same methodology, which the Bureau of Labor Statistics (BLS) uses. Published two days ahead of the governments employment statistics, this report is used by traders and market analysts as a reliable predictor of the official non-farm payrolls data. Creation of jobs has a direct link to consumer spending, while the latter is a major driving force behind growth in a consumption-based economy. Therefore, in case new jobs growth came above expectations, this would have a moderate-to-strong bullish effect on the US dollar. The official figure is scheduled to be released at 13:15 GMT.

Feds Yellen speech

At 16:00 GMT the Fed Chair Janet Yellen is expected to take a statement. Moderate-to-high volatility of the currency pairs containing the US dollar is usually present during such events.

Feds Beige Book report

At 19:00 GMT the Federal Reserve is to release its ”Beige Book” report, which is published eight times during the year. Each of the banks in the 12 Federal Reserve Districts gathers data in regard to current economic situation in the country on the basis of interviews with key business contacts, economists, market experts, and other sources. In case the Beige Book presents an optimistic economic outlook, this will usually support the greenback, while a pessimistic view will have a bearish effect on the currency.

Bond Yield Spread

The yield on German 2-year government bonds went as high as -0.408% on December 1st, after which it closed at -0.430% to lose 1.6 basis point (0.016 percentage point) in comparison with November 30th. It has been the fifth drop in the past seven trading days and also a second consecutive one.

The yield on US 2-year government bonds climbed as high as 0.950% on December 1st, after which it closed at 0.919% to lose 1.5 basis points (0.015 percentage point) compared to November 30th. It has been the second drop in the past twelve trading days.

The spread between 2-year US and 2-year German bond yields, which reflects the flow of funds in a short term, widened to 1.349% on December 1st from 1.348% on November 30th. The December 1st yield spread has been the largest one since November 26th, when the difference was 1.350%.

Meanwhile, the yield on German 10-year government bonds soared as high as 0.521% on December 1st, or the highest level since November 25th (0.525%), after which it slid to 0.469% at the close to lose 0.006 percentage point compared to November 30th. It has been the fifth drop in the past seven trading days.

The yield on US 10-year government bonds climbed as high as 2.239% on December 1st, after which it slipped to 2.155% at the close to lose 5.3 basis points (0.053 percentage point) compared to November 30th. It has been the seventh consecutive trading day of decrease.

The spread between 10-year US and 10-year German bond yields narrowed to 1.686% on December 1st from 1.733% on November 30th. The December 1st yield difference has been the lowest one since November 9th, when the spread was 1.679%.

Taking into account the period January-November 2015 and basing our calculations on weekly closing prices, we came to the conclusion that EUR/USD performance and the development of the yield spread between 10-year bonds in the United States and Germany showed a correlation of -0.6969, or the pair and the spread moved strongly in opposite directions. As the yield spread grew in favor of the 10-year US bonds, the US dollar gained ground against the euro. During the period January-November, EUR/USD has depreciated 10.34%, while the spread between 10-year bond yields in both countries has widened 16.35% to reach approximately 1.71% in late November from approximately 1.47% in early January.