Euro Price Outlook: EUR/USD Fresh Highs Ahead of ECB as Pullback Continues

Euro, EUR/USD, ECB Talking Points:

• It’s been a beating in the single currency since July, when EUR/USD set its current high ahead of an 11-week losing streak in the pair.
• This Thursday brings the European Central Bank rate decision for the month of October. There’s a wide expectation that the ECB may pause rate hikes but that’s not necessarily a new idea as it’s been a contributing factor in the currency’s fall over the past three months. The big question now is whether markets have over-done the pricing-out of rate hikes from the ECB. This can lead to short-squeeze scenarios as we near that rate meeting on Thursday.
• Also of interest is sentiment in the matter, and as I’ve been discussing for much of October, the pair has found difficulty with the bearish trend below 1.0500, which keeps the door open for deeper pullback potential. That’s so far led to the print of a fresh October high this morning.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

The ECB meets on Thursday and it’s long been expected that the bank may not hike at this meeting, and the hike seen last month may have been their last hike for this cycle. This has been at least part of the reason behind the reversal in EUR/USD over the summer and into the fall, when the pair went from an aggressive bullish trend to a strong bearish move after topping out at 1.1275 in July.

That bearish run shed more than 800 pips from spot prices over the next three months. But, as I’ve been talking about in webinars over the past few weeks the concern now is whether the pair is oversold, and to tie this with the fundamental theme, that would go along with the possibility that rate-pause bets possibly being overdone.

The pair began to test the 1.0500 level last month and hasn’t been able to do much below that price since. Bears have retained a degree of aggression, at least earlier in the month, helping to defend the resistance zone beginning at 1.0611 that runs up to 1.0636. There was another test at the top of that zone two weeks ago, at which point price was confluent with a bearish trendline taken from the July high. That led to another push down to support, but this time another higher-low held right at the 1.0500 level.

Last week was the first that 1.0500 hadn’t traded in the pair since the testing of that level had begun in late-September, and that was yet another higher-low. That’s led into a bullish breakout to begin this week, and EUR/USD is currently trading at a fresh October high.

EUR/USD Four-Hour Price Chart

EUR/USD: Bear Flag or Bullish Reversal?

It’s still quite early and at this point it appears that what we’re seeing are shorts squaring up ahead of the ECB rate decision. We’ve only seen a little more than 23.6% of that bearish trend erased at this point, so the bounce is still relatively mild considering the trend that led into it; and it would be wise to avoid reading too much into it at this point.

But many bullish reversals begin as short squeezes, and with ECB and FOMC rate decisions on the calendar for the next week, with NFP on the Friday following the Fed, there’s a plethora of opportunity for fresh trends to present themselves. A busy economic calendar, such as what we have on the horizon, demands a more open mind with more possible scenarios for how price may play out.

From the daily chart of EUR/USD, we can see the pair still working within the confines of a bear flag formation. The next spot of possible resistance sits just overhead at 1.0673, after which a big spot appears around the 38.2% Fibonacci retracement of the recent sell-off, which is confluent with a prior swing-low turned resistance.

EUR/USD Daily Chart

EUR/USD Weekly

Stepping back to the long-term chart highlights some important context, and this is one of the reason’s that I’ve been talking about that 1.0500 level so much over the past few weeks. A consistent and steady trend has all-of-the-sudden stalled at the big figure and despite four weeks of tests, bears were unable to prod a lasting break.

This doesn’t necessarily mean that the bearish trend is over, as this may have simply been an episode of over-crowding. This is the important role of sentiment in the matter and taking a note from the USD, there were multiple items of bullish data in which the USD did not respond with strength, such as the retail sales report last week, or the NFP report earlier in the month. These items suggest that the USD bullish trend was over-crowded, and this can allude to a similar mirror-image scenario in USD.

The big question with these types of setups is where sellers may re-enter or how bears treat tests of possible resistance levels. The 1.0673 level doesn’t seem as important here, but the 1.0766 level still retains a degree of interest. Above that, the 50% mark of the recent sell-off plots at 1.0862, and above that is a big zone around the 61.8% Fibonacci retracement, which is confluent with the 1.0943 level.

That zone coming back into play would be a big statement from bulls, especially if it happens over the next couple of weeks when we’ll be seeing a litany of high-impact drivers. These areas are also opportune spots for bears to show their hands in the event that we do get those pullbacks pricing in more deeply, and this will likely have some toll on trends in all of Euro, USD and EUR/USD into the end of the year.

EUR/USD Weekly Price Chart

--- written by James Stanley, Senior Strategist