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The trading results in the EUR/USD the past four weeks have demonstrated that perceptions of an oversold market have been wrong. The EUR/USD has continued to break below support levels with rapid fire ability and likely has caused anyone trying to bet on upside price action scratching their head in disbelief and pain. However, the ability of the EUR/USD to fall through the 1.08000 level actually occurred early in September and since then it feels like chain of events fundamentally has led to the currency pair producing even more weakness.
The European Central Bank raised its Main Refinancing Rate on the 14th of September. Until that moment the EUR/USD was comfortably slugging along near the 1.07500 vicinity. While it was not a great surprise the ECB raised its key lending rate by another 0.25% it did catch many financial institutions seemingly off balance and the EUR/USD wobbled more.
The EUR/USD began to drop dramatically after the rate announcement by the ECB and essentially fell to a low of nearly 1.06330. The low price accomplished on the 14th of September happens to be where the EUR/USD is trading as of this writing as the last week of trading begins in September and traders worry about what will happen in October.
The ECB Interest Rate Hike caused Havoc and a Backlash Perhaps
While defenders of the interest rate hike from the European Central Bank were quick to point out the ECB is acting to make sure inflation is beaten for good and poses no danger, the high costs of energy has little to do with interest rate hikes from the ECB or the U.S Federal Reserve. Higher Crude Oil costs are occurring because of production cutback from Saudi Arabia mainly. Yes, the U.S economy remains stubbornly strong, but higher energy is not an issue the central banks can tackle alone.
Others said the ECB wanted to protect the value of the EUR/USD because of the strength the USD has produced globally the past few months. But again the strength of the USD is occurring largely because higher interest rates are producing attractive yields in U.S Treasuries. Meaning central bank policy via the ECB and Federal Reserve deserve a fair amount of criticism. German Business Climate data today came in slightly better than expected. Risk adverse trading is a key element of the USD strength.
More Data Coming and Risk Events for the EUR/USD
Germany will publish Consumer Price Index numbers on Thursday and the inflation results should be watched. Also the U.S will publish important GDP results on the same day. If U.S growth statistics continue to be better than expected this could fuel the acknowledgement the U.S Federal Reserve is going to raise the Federal Funds Rate again in November.
- Risk events in the U.S via a fear of a government shutdown by Congress could add to risk adverse sentiment this week.
- The EUR/USD is trading at lows it has not touched since the middle of March 2023.
- Support levels have consistently been proven weak the past three months, traders looking for a sustained reversal higher in the EUR/USD should remain very conservative.
EUR/USD Outlook for October 2023:
Speculative price range for EUR/USD is 1.04970 to 1.07980
The ability of the EUR/USD to break below the 1.08000 mark was rather surprising. The fact that EUR/USD support levels were made vulnerable in the first week of September, which essentially continued August’s selling added additional lower pressure. Credence to the strength of the USD and level of nervous behavioral sentiment which exists in the broad markets including Forex has grown the past handful of weeks. The weakness of the EUR/USD the past three months is correlated to other major currencies paired teamed against the USD.
As the EUR/USD broke below the 1.07500 mark in the middle of September, and its sustained trading below this ratio underscores the bearish nature of the existing mid-term trend. While some traders may justifiably believe over time the EUR/USD will prove to be oversold, for the moment wagering on a sudden tide of upwards traction to develop may be far too ambitious. Speculators should watch the current price of the EUR/USD and if the 1.06200 level is penetrated lower and is sustained, traders may need to consider the potential of the EUR/USD breaking 1.06000 and testing values below.
Quick hitting positions with plenty of risk management are a tactic that should be practiced with the EUR/USD. Having produced two very solid months of downwards velocity it seems hard to believe October could be worse, but if global risk adverse trading grows and sentiment remains fragile the EUR/USD could go lower.
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