Could EUR/USD stage a comeback?

This week’s Eurozone data has been mostly better than expected, but this hasn’t stopped the euro from falling to a four-month low against the dollar today.

This week’s Eurozone data has been mostly better than expected, but this hasn’t stopped the euro from falling to a four-month low against the dollar today. The EUR/USD sliced below 1.16 to drop to a low so far of around 1.1555, its weakest level since July 20, before bouncing back a little. The single currency has been trading lower against most major foreign currencies ever since the European Central Bank decided to extend its QE programme by at least another nine months starting from January, while simultaneously halving the pace of asset purchases to €30 billion. As well as a soft euro, the US dollar’s widespread rally has further pressured the EUR/USD. But how much lower could this pair fall? After all, the Fed’s balance sheet reduction plans and a highly likely rise in interest rates in December should be mostly priced in by now. What’s more, the new Fed President, Jerome Powell, is considered to be a dove. In the Eurozone, ongoing improvement in economic conditions should put upward pressure on inflation over time, thus increasing pressure on the ECB to tighten its belt faster.

So far, however, the markets have given the ECB the benefit of the doubt and the euro has fallen. Last week’s release of softer-than-expected inflation figures from the Eurozone underscored the ECB’s willingness to keep its monetary policy extraordinary loose. However, inflation aside, other regions of the Eurozone economy is continuing to improve. Indeed, third quarter GDP in the Eurozone grew by an above-forecast 0.6% quarter-over-quarter as we found out last week.  At the start of the this week, we have seen, among other things, an unexpected 1% jump in September German factory orders following an impressive 4.1% increase the month before; the Sentix Economic Index for the Euro area rose in early November to its highest level since July 2007, suggesting investors and analysts are continuing to feel bullish about the Eurozone’s economic prospects to levels not seen since before the financial crisis; and Euro zone’s monthly retail sales increased by an above-forecast 0.7% in September, pushing the annualised growth rate to the highest level since July 2015. While some Eurozone economic pointers have also disappointed this week (for example German industrial production, which fell by a larger than expected 1.6%, and the latest Eurozone PMIs, which were revised lower), over all, there’s been more signs of improving conditions across the currency bloc.

If the EUR/USD has any chance of making a good comeback, it will first need to reclaim some broken support levels now. This morning, it hit a key short-term support level around 1.1555, which was the last resistance prior to the EUR/USD’s breakout above the previous year’s high back in July. That rally ultimately failed to hold itself and in early September it started to drift back lower from just shy of 1.21, as old broken support at 1.2040/5 area (2012 low) turned into strong resistance. Since then, price has been drifting lower inside a bearish channel. With the EUR/USD also back below last year’s high of 1.1615, the bulls now need a few things to turn favourable for them in order to regain control – else it remains a bearish market. First and foremost, the bulls need price to reclaim the aforementioned 1.1615 level. If and when the euro goes above this level again then the latest breakdown could be considered a false move, which would be, in my view, a significant bullish development. Even then, the bulls will face further hurdles at higher levels, including at around 1.1670, the neckline of the Head and Shoulders pattern, 1.1710 and finally 1.1755, the latter being the last support prior to the breakdown that took place on the ECB day last month. Here we will also have the resistance trend of the bearish channel. But a rise above 1.1615 would be bullish in the short-term outlook, nonetheless. Meanwhile if the downtrend continues, then the next big target for the bears would be the psychologically-important 1.15 handle, followed by the 38.2% Fibonacci retracement level against this year’s range, at 1.1420/5 area, next. 

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