Euro Mauled by USD Strength as ECB Cuts Rates Again

Euro, USD, EUR/USD Talking Points:

• It was another breakdown in EUR/USD this morning and as of right now, the currency has sold off for 14 of the past 15 days.
• Last month’s ECB rate cut brought a rally to the pair, with EUR/USD eventually moving back up to 1.1200. But that’s where bulls were stalled and after a long-term resistance level came into play in late-September, sellers have taken over in a very big way.
• Not to be lost in the shuffle, but this morning’s initial breakdown in the pair did not hit on the rate cut announcement but the US retail sales report that was issued at 8:30 AM ET. The move did extend after the start of Lagarde’s presser, but the dominant driver here has been the pricing-in of expected divergence between Europe and the US.

EUR/USD continues the drop and that’s been a consistent feature of Q4 trade, so far. The pair is now working on its 14^th red day of the past 15 and this morning has seen a fast run from sellers as EUR/USD is now showing oversold conditions on the daily chart. The last time that happened was back in April, just as the pair was setting its current 2024 low.

 

EUR/USD Daily Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

 

EUR/USD Stark Change-of-Pace

 

When the ECB cut rates last month, the pair put in a ‘rate cut rally,’ eventually rising back to the same 1.1200 resistance that had held the highs in late-August.

This morning’s reaction is obviously different, and the big question is ‘why.’

The primary difference at this point is the dominant trend. In Q3, the US Dollar was extremely weak for the first two months of the quarter until the move started to stall in September. And even with the Fed kicking off a rate cut cycle, USD bears just spun their wheels, forming a falling wedge formation as RSI divergence built.

And so far in Q4 US data has been pretty strong, echoed again this morning with a strong US retail sales report. This brings question to all the rate cuts that the market has priced-in as we’ve now seen a stronger-than-expected NFP report, above-expected CPI print and now a really strong showing in US retail sales.

Meanwhile in Europe, there’s worry about the jobs market, which isn’t even the ECB’s mandate as they’re a single mandate central bank. But given Lagarde’s prior incorporate of climate change as a policy parameter it should come as no surprise that the bank has widened their responsibility.

If we look at Core CPI in Europe, however, it illustrates similar stall that was showing in core inflation in the US ahead of the Fed’s ‘jumbo rate cut.’

The Eurozone Core CPI print released in May was 2.7%. And the Eurozone Core CPI print released this morning was also at 2.7%. And during the summer, that data point had popped up to 2.9% so the question of falling inflation remains a conundrum for the bloc but that hasn’t stopped the ECB from nudging rates lower.

 

EUR/USD Strategy

 

For the matter of shorter-term strategy, the challenge remains clear: The trend remains decisive and one-sided yet adding exposure after such a run, with oversold readings showing on a variety of time frames, can be seen as trying to chase a falling knife. That also doesn’t mean that catching a falling knife is a wise idea as something moving down drastically is not in-and-of-itself a cogent trading strategy.

Bounces so far have been treated aggressively by sellers with this week seeing resistance at prior support of the 1.0900 handle. And last week, the same happened around 1.1000 with sellers holding the low just 2.7 pips inside of the big figure; after which the same happened at 1.0950.

Perhaps the more attractive scenario is to look for some element of profit taking to come in ahead of the weekly close, at which point another point of possible lower-high resistance may allow for short-side entry.

There’s a Fibonacci level plotted at 1.0862 that had initially showed as support this morning. If bears remain very aggressive, that could be a point of interest. If we do see larger-scale profit taking, the look for resistance can simply cast higher, towards the 1.0900 or 1.0943-1.0960 levels that have already shown some element of reaction.

 

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

 

--- written by James Stanley, Senior Strategist

Euro, USD, EUR/USD Talking Points:

• It was another breakdown in EUR/USD this morning and as of right now, the currency has sold off for 14 of the past 15 days.
• Last month’s ECB rate cut brought a rally to the pair, with EUR/USD eventually moving back up to 1.1200. But that’s where bulls were stalled and after a long-term resistance level came into play in late-September, sellers have taken over in a very big way.
• Not to be lost in the shuffle, but this morning’s initial breakdown in the pair did not hit on the rate cut announcement but the US retail sales report that was issued at 8:30 AM ET. The move did extend after the start of Lagarde’s presser, but the dominant driver here has been the pricing-in of expected divergence between Europe and the US.

EUR/USD continues the drop and that’s been a consistent feature of Q4 trade, so far. The pair is now working on its 14^th red day of the past 15 and this morning has seen a fast run from sellers as EUR/USD is now showing oversold conditions on the daily chart. The last time that happened was back in April, just as the pair was setting its current 2024 low.

 

EUR/USD Daily Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

 

EUR/USD Stark Change-of-Pace

 

When the ECB cut rates last month, the pair put in a ‘rate cut rally,’ eventually rising back to the same 1.1200 resistance that had held the highs in late-August.

This morning’s reaction is obviously different, and the big question is ‘why.’

The primary difference at this point is the dominant trend. In Q3, the US Dollar was extremely weak for the first two months of the quarter until the move started to stall in September. And even with the Fed kicking off a rate cut cycle, USD bears just spun their wheels, forming a falling wedge formation as RSI divergence built.

And so far in Q4 US data has been pretty strong, echoed again this morning with a strong US retail sales report. This brings question to all the rate cuts that the market has priced-in as we’ve now seen a stronger-than-expected NFP report, above-expected CPI print and now a really strong showing in US retail sales.

Meanwhile in Europe, there’s worry about the jobs market, which isn’t even the ECB’s mandate as they’re a single mandate central bank. But given Lagarde’s prior incorporate of climate change as a policy parameter it should come as no surprise that the bank has widened their responsibility.

If we look at Core CPI in Europe, however, it illustrates similar stall that was showing in core inflation in the US ahead of the Fed’s ‘jumbo rate cut.’

The Eurozone Core CPI print released in May was 2.7%. And the Eurozone Core CPI print released this morning was also at 2.7%. And during the summer, that data point had popped up to 2.9% so the question of falling inflation remains a conundrum for the bloc but that hasn’t stopped the ECB from nudging rates lower.

 

EUR/USD Strategy

 

For the matter of shorter-term strategy, the challenge remains clear: The trend remains decisive and one-sided yet adding exposure after such a run, with oversold readings showing on a variety of time frames, can be seen as trying to chase a falling knife. That also doesn’t mean that catching a falling knife is a wise idea as something moving down drastically is not in-and-of-itself a cogent trading strategy.

Bounces so far have been treated aggressively by sellers with this week seeing resistance at prior support of the 1.0900 handle. And last week, the same happened around 1.1000 with sellers holding the low just 2.7 pips inside of the big figure; after which the same happened at 1.0950.

Perhaps the more attractive scenario is to look for some element of profit taking to come in ahead of the weekly close, at which point another point of possible lower-high resistance may allow for short-side entry.

There’s a Fibonacci level plotted at 1.0862 that had initially showed as support this morning. If bears remain very aggressive, that could be a point of interest. If we do see larger-scale profit taking, the look for resistance can simply cast higher, towards the 1.0900 or 1.0943-1.0960 levels that have already shown some element of reaction.

 

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

 

--- written by James Stanley, Senior Strategist