EUR/USD, Oil Forecast: Two trades to watch

EUR/USD rises, but the bearish outlook remains

EUR/USD is rising towards 1.1160 in early trade on Monday, as a hawkish stance from the ECB adds some support to the euro. However, the longer-term bearish bias remains intact.

Last week, ECB President Christine Lagarde said that the central bank would be looking at indicators for signs that another rate hike is warranted next month, after leaving rates unchanged in October.

The market is pricing in an 80% probability of a 25-basis-point hike. This comes as inflation in the region topped 4% in September amid rising energy prices across October owing to the Middle East conflict.

Still oil fell last week, with Brent down 16% last week. Even so, euro's latest showing has been rather unimpressive. Not even the large U.S. tech sell-off was enough to prompt buying in EUR/USD.

The U.S. dollar came under pressure on Friday after posting gains last week. The greenback was supported by safe-haven flows following the midterm elections and the stronger-than-expected U.S. nonfarm payroll report, which smashed expectations. The U.S. recorded 165,000 jobs added, more than double the 65,000 forecast. The strong data supports the view that the Fed will hike rates again in December.

Attention this week will be on U.S. inflation figures on Tuesday and PPI data on Friday. CPI is expected to rise to 3.9% year-on-year in October, up from 3.7%. However, a 15% rise in oil across October could result in an upside surprise.

In addition to economic data and a calendar full of Fed speakers, attention will also be on the performance of the AI trade. A rotation into Treasuries as safe havens supported the view that we saw a rotation into cash, but not necessarily out of the dollar.

The euro's inability to capitalise on dollar weakness and falling energy prices suggests that markets are not yet convinced by the prospect of further ECB tightening. With the Fed also expected to remain hawkish, the interest-rate differential could continue to limit EUR/USD gains.

EUR/USD forecast – technical analysis

EUR/USD trades below its falling trendline, as well as its 50 and 200 EMAs, keeping the technical picture bearish.

While the price has recovered from the 1.11 lows in late October, gains have been capped by 1.1275.

Buyers would need to retake this level and the 50 EMA at 1.13 in order to turn attention to 1.1375, the July low, and put the price on a firmer footing.

On the downside, sellers need to take out 1.11 to extend the bearish move towards the 1.10 psychological level.

Oil falls further as hopes of restraint and diplomacy in the Middle East rise

Oil prices are under pressure at the start of the new week after slumping sharply last week. This follows President Trump lowering expectations of renewed strikes on Iran, even as attacks continue in the Strait of Hormuz.

Last week, Brent tumbled 16% in its steepest weekly decline since the Covid pandemic, while WTI fell 12%.

The declines came following the midterm elections and the Democrats taking control of Congress, fuelling optimism surrounding de-escalation in the Middle East, even though a comprehensive agreement between Washington and Tehran has yet to materialise.

The market will want to see a diplomatic breakthrough, combined with the normalisation of shipping through the Strait of Hormuz, for prices to fall significantly further.

Trump said on Sunday that he was unlikely to order further attacks on Iran as long as talks to end the conflict progressed.

At the same time, attacks on ships in or near the Strait of Hormuz have continued.

Meanwhile, JP Morgan warned that oil is heading for a glut as recovering flows from the Middle East, calmer seas and weak demand have pushed global supply above consumption. The investment bank estimates a surplus of 1.1 million barrels a day in September, widening to 1.4 million barrels a day in October.

Oil forecast – technical analysis

After running into resistance at $105, oil turned lower, breaking out of its rising channel and falling below the 50 EMA to find support around $88.

Sellers, supported by recent price action and the RSI below 50, will need to break below $88, the 50% Fibonacci retracement of the move from the $55 low to the $120 high, and below the 200 EMA at $85 in order to gain traction towards $80, the 61.8% Fibonacci level.

Should the $88 support hold, buyers will look to rise above the 50 EMA at $94 and the 38.2% Fibonacci retracement at $95. A rise above here turns attention to the $100 psychological level and $105, the 23.6% Fibonacci retracement. A move above $105 would create a higher high.