EUR/USD due for a corrective bounce?

Forex trading
Fawad Razaqzada
By :  ,  Market Analyst

With all the attention on the pound today, there was some sharp movements in the euro which you may have missed. The single currency dropped to a fresh low on the year against the greenback, reaching a low of 0.9551 before bouncing back to hit 0.9700, from where it has since drifted back lower. The EUR/USD has now fallen for the fifth consecutive day. However, it was still off the lows at the time of writing, along with the GBP/USD. Will there be any dup buying as we head to the European close?

While there are no obvious signs of a bottom in the EUR/USD yet, there’s the possibility we may see some short-covering at the start of this week, primarily due to the prospects of some coordinated central bank action while the lack of fresh news may encourage short-side profit-taking. In addition, the ECB is acknowledging that the growth and inflation outlook has deteriorated and that the risks on latter are on the upside because of a weaker exchange rate. This is what President Lagarde said earlier today, which cause a bit of a bounce in the euro, although the upside remained capped as investors worried about the health of the economy. Any front-loading of interest rate hikes will only bring forward the time the ECB cuts again to help boost the economy. The central bank’s hands are tied, like the BoE and others.

The market has now fully priced in a 75-bps hike in October. Given that there are now elevated risks that the inflation target will not be met as quickly as the ECB would like, watch out for even aggressive rate increases and other measures to shore up the euro.

At these levels, most of the downside risks might well be priced in for the euro. You don’t need to look at the Relative Strength Index (RSI) indicator on the chart, but the EUR/USD is severely oversold. Consequently, a bit of a bounce back should not come as a surprise. However, for us to turn positive on the EUR/USD, we will need to see a clear reversal signal. For now, we are only expecting a short-covering bounce at best. We don’t think the series of lower highs will be broken until there’s a concrete plan from the ECB to tackle the issues facing the single currency

Key data this week

Data watchers will be keeping a close eye on incoming inflation numbers as they will impact the pace of future tightening. In a relatively quieter week for data after last week’s major central bank meetings, the CB Consumer Confidence index is among a handful of US macro pointers to be released throughout the week. The other being the Fed’s favourite measures of inflation, the core PCE price index, which has the potential to move the markets on Friday. Collectively, they may have an impact on pricing of future Fed rate hikes.

Meanwhile from the euro area, we have CPI on Friday although German inflation numbers will be released a day earlier which will be as if not more important. Eurozone CPI has repeatedly broken records this year and in August it rose to an eye-watering 9.1% annual rate. Are we going to see double digits given the further weakness in the single currency? If so, this will cement expectations about a 75-basis point ECB rate hike on October 27, and potentially lead to speculation about an even more aggressive approach from the central bank. 

 

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Related tags: Trade Ideas Forex EUR/USD

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