Five-Day EUR/USD Exchange Rate Forecasts Confirms Further Recovery Potential
We wrote ahead of the new week that we thought the EUR/USD would recover lost ground and so far the call is looking correct. But where are our targets?
The EUR/USD trades back above 1.10 at the time of writing having bounced off the recent multi-month lows at 1.0963.
Aiding a bounce was news that Eurozone inflation for September read at 0.4%, a healthy 0.2% improvement on the previous month.
This suggests to markets that the European Central Bank's policy measures, aimed at stimulating prices and economic growth, are potentially working.
It also suggests that the risks of further EUR-negative policy moves from the ECB over coming months are diminishing.
However, the US Dollar has been the driving force behind EUR/USD this October and while near-term relief can be expected we cannot say the Dollar is done.
The Dollar pushed EUR/USD lower on the back of firming expectations that rate-setters in the US will raise interest rates by 0.25% in December.
Governor of the Fed Janet Yellen’s speech on Friday, October 14, suggested as much after she said being accommodative for too long might have its costs.
Boston Fed’s Rosengren added to the trend by saying that market expectations for a December rate hike were “about right”.
He added in an interview on Saturday 15th that he believes the US was close to overshooting his estimate of full employment and as a result the market was hot.
Technical Analysis Suggests an Important Low has Been Reached
The Euro broke down out of its right-angled triangle pattern on rumours the ECB is considering extending its QE programme, and swiftly moved lower, surpassing its minimum downside target at 1.1000 and ending the week at a low of 1.0971.
It has now touched down on several layers of support, which will be difficult to break below.
On our chart, we note the S3 monthly pivot at 1.0969, a level used by traders to open orders against the prevailing trade, and this will be a significant barrier against further downside.
The exchange rate rarely moves beyond S3 so having reached it is a sign the pair may be extremely overextended in October.
This indicates the possibility the pair may have reached an important low, however, with no signs from price action yet, that the pair is about to reverse, it is too early to call a bullish reversal.
Commerzbank’s Senior Analyst Axel Rudolph also notes major support at Friday’s lows, however, his support comes from a different source.
Rudolph identifies a sloping, eight-month-old, trend-line connecting former lows (see chart below).
This adds weight to the possibility the pair may stall and eventually rotate higher.
Data to Watch from the US
Core CPI in September will be released on Tuesday and is expected to slow to 0.2% from 0.3%.
Any rise in CPI could intensify rate hike expectations and propel the dollar higher.
Wednesday sees the release of Building Permits in September, with a rise to 1.15m forecast from 1.52m previously.
Thursday sees the release of the Philadelphia Fed Manufacturing Index for October, with a 5.5 result expected, from 12.8 previously.
September Existing Home Sales are also released on Thursday, with 5.38m expected, from 5.33m previously.