- The EUR/USD exchange rate faces the risk of further losses in the coming days; however, the downward momentum is likely to fade.
- Recent selling has pushed the EUR/USD pair towards the 1.0952 support level, where it is currently stabilizing.
- The positive US jobs data gave a strong boost to the US dollar against other major currencies.
Commenting on forex trading, Francesco Pesole, a forex market analyst at ING Bank, said, "The foreign exchange market has undergone a difficult readjustment as the idea of an aggressively dovish US Federal Reserve has now evaporated," which summarizes the overarching theme of recent days that led to a significant rally in the US dollar.
Unequivocally, a strong US Labor market report last Friday means that the Federal Reserve is unlikely to cut US interest rates by 75 basis points in 2024, meaning investors are likely to get just two more 25 basis point moves. This adjustment in expectations was reflected in a stronger dollar that sent EUR/USD down 1.68% last week, cutting its 50-day moving average in the process and turning the setup from bullish to neutral, with the potential for a slide to the downside increasing.
The extent of the additional decline in the EUR/USD pair will depend on the degree of remaining repricing. We suspect that the lion's share of this has now happened, which should allow the euro to breathe better and start to consolidate. However, strength is likely to be limited from here and many market participants may use rebounds to get rid of exposure or enter new short positions.
Kenneth Brooks, an analyst at Société Générale, says that the repricing of more hawkish US interest rate expectations for the EUR/USD pair comes at the worst possible time. The analyst added, "This has caused the most pain at a time when the European Central Bank is planning a final interest rate cut. The spreads in favour of the dollar are widening at the front and long end. The highs of this year at 1.12 may not be revisited anytime soon, and we should prepare for a deeper decline. The 200-day average is 1.0873."
Meanwhile, the market has raised expectations that the ECB will cut rates again next week in response to eurozone inflation figures that came in below consensus in September and continued evidence of a slowdown in the region. In mid-September, the ECB was expected to wait until December before cutting rates again.
Looking at the charts, the daily RSI is at 37 and pointing lower, which supports further weakness in the near term. Now, the EUR/USD pair may be on its way to testing the 100-day moving average support at 1.0929 where some buying interest may emerge, as was the case the last time the exchange rate reached this point in August.
According to the economic calendar results, Thursday’s US inflation report is the highlight of the week for the forex market, as it will determine how market sentiment evolves in line with expectations of a rate cut by the Federal Reserve. A lower-than-expected reading would boost hopes that the Fed will cut interest rates twice more in 2024, which could boost the recovery of the US dollar against the euro.
The markets are looking for a reading of 2.3% YoY and 0.1% MoM. Anything above that could push interest rate cut expectations back further and could see the pound struggle until the end of the week. Further downside risks to the EUR/USD come in the form of ongoing geopolitical concerns cantered around the Middle East. Moreover, keep in mind that Israel has promised a strong response to last week’s Iranian missile attack. The size and nature of the attack could be significant and could drive demand for currencies that investors seek when they are fearful, such as the USD, JPY and CHF.
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EUR/USD Technical analysis and forecast:
The EUR/USD pair has recently declined below the double top neckline to confirm that the reversal from the previous uptrend is underway. Using a Fibonacci retracement tool shows additional levels where sellers may hope to join. The 38.2% Fibonacci is located at 1.1057, then the 50% Fibonacci is at 1.1088. technically, the larger correction could reach the 61.8% Fibonacci at 1.1120 near the dynamic pivot point of the 100-simple moving average. If any of the Fibonacci levels hold as resistance, the EUR/USD pair may resume its decline to the lowest swing low at 1.0975 or lower.
As for the moving averages, the 100 SMA is currently above the 200 SMA, indicating bullish momentum. However, the gap between the technical indicators has narrowed significantly to indicate a potential bearish crossover. EUR/USD is also trading below both moving averages, so they could form dynamic resistance. However, Stochastic is signalling oversold or exhaustion among sellers, so a bullish trend means buyers are ready to take control. The oscillator has plenty of room to run before reaching overbought territory, so the correction could continue until that happens. Similarly, the RSI is in oversold territory to show that sellers are exhausted and could use a quick retest of nearby resistance areas, perhaps at the broken neckline around 1.1000, to gather more bearish energy.
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