The key bull/bear line in the sand for EUR/USD has been broken to the downside, once again marking a major shift in the trend outlook for the currency pair.
The level we’re referring to is a zone between 1.1025 and 1.1072, which is a former resistance from March.
The US Dollar has been on a roll for the past 5 months, each month making higher highs. Our call for a lower EUR/USD and a higher USD/JPY has seen quite generous outcomes but nothing is forever in the forex markets. We believe that now is the time for a correction in the EUR/USD downtrend, as well as in the USD/JPY uptrend.
When Janet Yellen took over the reins of the Federal Reserve earlier in 2014, the markets were expecting to see the Fed continue with its dovish monetary policies. On the contrary, over the months, under the leadership of Janet Yellen, the US Federal Reserve oversaw the end of the 'punch bowl' era as QE3 was eventually ended. The markets soon shifted focus to the interest rates, which remained historically low at 0.25%
In the course of the past few quarters, the dovish assumptions of Ms. Yellen however seemed to change however.
The Bank of Japan has been giving it's all to fight falling prices in Japan, trying to break the vicious cycle of deflation that has been a staple of the Japanese economy for 25 years. They've been fighting it for over 2 years now with massive quantitative easing, where the BoJ buys government bonds to lower interest rates and hopefully encourage more borrowing and spending from consumers and businesses.
We previously wrote about the reasoning behind the idea that the Federal Reserve will hold rates near zero for the rest of 2015 and probably most of 2016. The idea that there is some looming tightening cycle, which will propel the Federal Funds Rate above 0 and 1 percent is overblown. In fact, even if the Fed lifts rates from the literal 0% bound they are at right now, it will only be a symbolic gesture to show that the Fed truly doesn't want to keep them at zero.
Financial media is citing the poor global economy as the main reason for Fed Chairwoman Janet Yellen's decision to keep US interest rates near 0%.
The real reason is because inflation, the most important factor for central bank monetary policy, is nonexistent.
If the break of the channel 1.0800/1.1400 is confirmed (the week is closed above 1.1400), we can see a gradual move towards the previously set high of 1.1700. The break above 1.1700 opens way towards a very strong level of 1.2000.
The last time the US Federal Reserve raised interest rates was in 2006. Almost 10 years ago.
The ECB announced yesterday not only that the growth of the Eurozone will remain subdued and inflation will remain below target, but also that they will increase quantitative easing and may extend the end of the program as well.