EUR/USD rolling over into the ECB meeting?
It’s been a fairly quiet start in the FX space this week as Q3 earnings and record highs in Elon Musk’s wallet/US stock indices grab the headlines. US crude came to within a whisker of $85 a barrel on Monday, its highest in seven years as traders bet that crude supplies would not keep pace with fast-rising global demand.
The euro has been one of the worst performers in the G10 this month as the region is a net energy importer and is suffering the negative income shock from higher energy prices. Of course, this is also not helped by one of the most dovish major central banks, who meet this week on Thursday.
Recent disappointing data, in the form of the German IFO business survey, showed that the expectations index continued to decline to it slowest level since February. It seems the region’s energy crunch and continued supply shortages are damaging business confidence. The German Bundesbank also slashed its growth estimates for this year to 2.4% from 3.7% in its April forecast.
This all means the ECB is likely to keep its cautious stance and outlook, at least until its full review in December, despite rising inflation expectations. This ultra-dovishness should remain a drag on the EUR going forward.
Technically, EUR/USD made a new cycle low at 1.1524 in mid-October before rebounding. The descending channel from the September high at 1.1909 looked to have been broken with previous support/resistance around 1.16 also pierced.
But the EUR’s failure to break above the August low at 1.1660 on a number of occasions recently points to persistent selling and bearish pressure on the single currency going forward. A break of yesterday’s low at 1.1590 sees a test of 1.15 over the next few weeks.
The ECB will have to upgrade its inflation forecasts which will cause some consternation at the inherently dovish central bank. If President Lagarde does spring an unlikely hawkish surprise, the euro will find a bid, but resistance above the 1.1660 area next comes in around the 1.17 zone. The 50-day simple moving average sits here as well as trendline resistance from the June high at 1.1708.