The contrarian case for a EUR/USD rally if rates can break above 1.00

Research
Matt Weller
By :  ,  Head of Market Research

It’s not particularly hard to make a bearish case for the European economy, especially relative to the US – heck, I’ve done it myself numerous times over the last few weeks!

Between a war in its backyard, energy shortages, and an imminent economic recession, it would be hard for the outlook for the Eurozone to look much darker. But, as theologian Thomas Fuller first noted nearly 400 years ago, the night is darkest just before the dawn. The mere fact that the Eurozone’s headwinds are so apparent and well-known suggests that there’s at least a chance that they’re already factored into the current market prices.

Meanwhile, traders are pricing in a terminal Fed Funds rate of nearly 5.0% for next year, and it would take a concerted chorus of hawkish comments from the Fed to raise that projection further in the near term. With the month’s major US data (NFP and CPI) behind us, the market may shift its attention elsewhere over the next two weeks, potentially leading to consolidation or a correction in the greenback.

If we do see a counter-trend rally in the world’s most widely-traded currency pair, the key area to watch will be in the 0.9950-1.0000 zone, where the top of the bearish channel, the declining 50-day EMA, and key psychological resistance at parity all converge. If we do see a break above that key resistance confluence, it would confirm a higher low and higher high on the daily chart for the first time in 18 months and point toward an extended bounce toward the mid-September highs near 1.0200 or even previous-support-turned-resistance in the 1.0350 area.

FXEURUSD10182022

Source: TradingView, StoneX

Of course, the more logical (and likely more probable) outcome is that the EUR/USD bounce peters out quickly, as previous bounces have consistently for the past 18 months, and the single currency continues its relentless march lower as we march toward November.

Nonetheless it’s worth at least considering alternative ways that the future could play out. As author F Scott Fitzgerald famously quipped, "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

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