EUR/USD Exchange Rate: Hints the Sell-Off is Pausing

The EUR/USD is now oversold and could therefore be due a brief relief rally.

At the start of the new week the EUR/USD came under further pressure with the dollar index climbing to a nine-month high at 98.846 as EUR/USD tumbled to 1.0860.

Driving the move were expectations for a December interest rate rise in December which hit 70% following comments from a number of noted US Federal Reserve officials.

Technically, the EUR/USD pair is falling within an establishing short-term downtrend, which gained added impetus recently following bearish remarks from the European Central Bank governing council after their rate meeting.

This short-term trend will probably extend lower but only after a pause, since indicators such as then RSI below are now flashing oversold:

Therefore, although the 1.0800 target still stands there may be a consolidation or even a pull-back before the pair reaches it.

"The market showed the first sign of real support yesterday after the big sell-off of the past week. A doji candle (open and close around the same level) with the support at $1.0857 holding firm means that for the time being, the selling pressure has abated. The market is again supported today and moving into the European session a similar picture is emerging," says Richard Perry at Hantec Markets.

Effects of ECB Event to Linger

The EUR/USD weakened substantially as the President of the European Central Bank Mario Draghi told reporters that the ECB had not been discussing tapering its 80bn per month money printing (APP) programme.

Traders were looking for a hint of such a discussion to justify buying back into the weakened currency.

Further, he raised the possibility that continued flat inflation and growth could actually lead the ECB to expand its monthly injections into the economy.

Whilst markets had been cautious about forecasting more stimulus from the ECB due to its harmful effects on the fragile banking system – especially after the Deutsche crisis – they seem to have ignored that now, focusing instead on a possible extension of QE beyond the March end-date, or by the expansion of eligible bonds.

“A decision on policy settings will be made in December and an extension of the programme beyond March of next year appears more likely than not, considering the ECB President noted that economic risks remain tilted to the downside while core inflation was showing no sign of a convincing recovery.

“We remain bearish on the outlook for the EUR. Fed-ECB policy divergence and weak seasonal trends for the EUR suggest 1.05 should be a fairly easy reach for the market into year end,” commented Scotiabank’s FX Strategist Shaun Osborne.

Eurozone PMIs Beat Expectations

The Euro's weakness has been checked somewhat by the release of better-than-forecast Eurozone PMI data.

It was shown that Markit's Manufacturing PMI read at 53.3 for the month of October, ahead of forecasts for 52.6.

Services PMI read at 53.5, ahead of an expected 52.4 and the Composite PMI now stands at 53.7, ahead of the 52.6 forecasted.

However, whether the strong data translates into a sustained recovery in the Euro remains doubtful.

"The break below the "Brexit" low has opened the way towards 1.0820/26. The indicators are bearish across the board. Nor do we expect any significant upside stimulus to come from solid EMU data. Our favoured trading range: 1.0820 – 1.0980," says Ralf Umlauf at Helaba Bank in Frankfurt.

Also watch the German Ifo Business Climate Index out on Tuesday October 25 at 9:00 B.S.T, which is an important forward indicator, is expected to come out at 109.5.

Data for the Dollar

This week’s data highlight for the dollar is the release of third quarter GDP data.

This will be the first time markets will have seen third quarter growth data and the result is likely to have a significant impact on expectations of when the Federal Reserve will increase interest rates.

Currently, there is a greater than 50% probability that the Fed will increase rates by 0.25% or more in December.

Analysts estimates are for a rise in growth of 2.7% in Q3.

Other data includes Core Durable Goods in September and Pending Home Sales in October – which are both out on Thursday.

On Tuesday, Consumer Confidence is out, and expected to show a fall to 102.0 from 104.1.

New Home Sales in October, out on Wednesday are forecast to rise by 610k.