EURUSD, equities – too good to be true?

Euro advanced against the dollar and equities rallied yesterday as investors were bought to the announcement from Merkel and Sarkozy that recapitalization in a banking system is on the way and details on further measures will be worked out until the end of October. However, one should treat this rebound with caution. The EU summit was postponed (from 18^th to 23^rd of October) yesterday and that might suggest European leaders might be far from reaching consensus and even if France and Germany agreed on some principles, that does not imply a EU-wide support. We believe there might be agreement on recapitalization but reaching a consensus on a debt-reduction for Greece will be way tougher.

The EURUSD advanced yesterday to nearly 1,37. There is a relatively strong resistance at 1,3690 – local highs from late September and a 38,2% Fibo of the whole decline that begun at the beginning of last month. Should the bulls manage to push the pair higher, the next resistance will  be faced at 1,38. However, the whole movement should be seen as an upward correction. While investors reduced their bets on cuts in the eurozone somewhat following the ECB meeting, the interest rate picture still suggest a decline on the pair to ca. 1,31.

OIL – Brent moving close to 110 USD again

An improvement in a global sentiment and a favorable short term technical picture helped drive oil prices higher again. It was interesting to see that speculative investors reduced their long exposure somewhat until last Tuesday (the data for each Tuesday is released the following Friday evening) which drove the price of Brent to 8-month low of 99,09 USD per barrel. However on that day the price drew a hammer candle at an important support (99,25 – we wrote about it last week) that was followed by a rebound signaling an upward correction, which yesterday led us above 109 USD. It will be interesting to see how those speculative positions evolved over that period.

Even though the medium trend on oil is declining, the channel is very wide leaving a lot of room for dynamic upward corrections. The move we are observing now is one of those and a strong resistance is as far as 115 USD per barrel. In a longer perspective we expect oil price to decline though, especially as speculative investors unwind their long exposure on a slowing global demand.

Przemysław Kwiecień PhD, Chief Economist

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