EUR/USD: Fall Down to 1.10s now Possible
A decline down the the 1.10s in the Euro to Dollar exchange rate is now possible after US inflation data puts a rate hike back on the table.
The Euro-Dollar rate is seen at 1.1198 at the time of writing having successfully bounced back from the 1.1150 support zone.
This is a significant floor for the pair as the currency has not closed below here since late August despite various bouts of weakness.
However, Wednesday's much-anticipated US Federal Reserve policy decision could prompt a break lower.
The EUR/USD sold off heavily at the end of last week after the Dollar strengthened following the release of US inflation data showed a basis point rise above expectations in August.
Year-on-year inflation in the US rose 1.1% compared to 1.0% expected and 0.8% previous.
Month-on-month the measure rose 0.2%, beating forecasts of 0.1% and above the 0.0% July figure.
The rise in inflation increases the chances the Federal Reserve will raise interest rates before the end of the year.
The implied probability of such a rise happening at the FOMC meeting next Wednesday, based on Fed Funds Futures was still only 15% at the time of writing.
The probability of a hike in November is 23.8% and the probability of rate hike in December 52.8% - up from under 50% before the CPI release.
The data contrasts with comparable data from the Eurozone which shows a fairly steep slowdown in labour costs from 1.6% to 1.0% in Q2 compared to 2015.
This implies wages are not keeping pace with growth, and therefore there is unlikely to be a change to the persistently low inflation in the region.
The two sets of contrasting data increase expectations that central bank policy will diverge in the two countries, with the US Federal Reserve (Fed) tightening before year end and the European Central Bank (ECB) potentially increasing stimulus.
Tightening involves raising interest rates and tends to be positive for a currency as higher rates attract foreign investors seeking a higher return on their cash.
Stimulus tends to weaken a currency as it keeps interest rates low and dilutes the currency through increased liquidity.
The first main release for the euro in the week ahead is the ECB’s Economic Bulletin on Thursday, followed by Consumer Confidence in September.
On Friday there is a data dump which includes preliminary Eurozone Manufacturing and Services PMI in September.
Technical Analysis: A Potential Breakout
The charts show the pair in a range, within a range and the euro currently selling off versus the dollar.
There is a possibility the pair has formed a symmetrical triangle:
This could signal the possibility of a breakout on the horizon.
An interesting technical feature is the cluster made up of the 50 and 200 day moving averages situated at the lows of the day’s range at 1.1150.
Moving averages can be important levels of support and resistance and these are likely to prove difficult to break below, nevertheless the MACD is indicating that this may be the case.
The momentum indicator looks poised to continue lower and fall below the zero-line, providing an important bearish signal.
This would seem to indicate the likelihood the exchange rate will continue to fall too.
A possible initial downside target could be the lower border of the triangle at 1.1025.
A break clearly below the MA’s would be required for confirmation, with a move below 1.1100 providing the initiating signal.
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