EUR/USD – Is a Bottom Near?

EUR/USD – Is a Bottom Near?

EUR/USD – Is a Bottom Near?

October has been a very challenging month for the euro. The single currency came under aggressive selling pressure, falling from a high above 1.12 to a low below 1.10. What’s interesting about the move is that it had very little to do with Europe’s troubles. A larger part of the weakness was driven by rising U.S. rates that took the 2 year German – U.S. yield spread to a decade low. But Treasury yields have since peaked and the yield spread is pointing sharply higher. EUR/USD barely budged as it becomes clear that investors are holding out for the ECB. In order for the euro to rally, we need ECB President Draghi to suggest that he’s comfortable with the current level of monetary policy. There’s been significantly more improvement than deterioration since the last ECB meeting – so optimism is warranted. The lower euro also goes a long way in supporting the economy through trade and inflation. The last time the ECB met, President Draghi expressed more confidence about the outlook for the Eurozone economy, using the word resilience on numerous occasions but the EUR/USD ended the day lower because they cut their growth forecasts and announced Eurosystem committees to further evaluate stimulus options. If Mario Draghi puts greater emphasis on the need for more stimulus tomorrow, EUR/USD could hit 1.09 but if he’s optimistic and emphasizes resilience and we think he will given recent data, EUR/USD could find its way back to 1.11.

Technically, the first line of support in the EUR/USD is 1.0950. If this level is broken, it should be a quick move to 1.09. Below there, the next area to level to watch is 1.0825. On the upside, EUR/USD needs to take out its October 18 high of 1.1025 to see a stronger move to 1.11. Even a mild degree of optimism by the ECB could take it there after which EUR/USD needs to break 1.1050 to confirm a bottom.

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