Many bearish factors have already been priced in EURUSD quotes, leading sellers to lock in profits. As a result, the likelihood of either a correction or consolidation in the main currency pair is increasing. Let’s discuss it and make a trading plan.
The article covers the following subjects:
Highlights and key points
- USD index rally is 60% Trump trade related.
- The German economy is not as bad as expected.
- Insider information suggesting an acceleration of the ECB rate cut cycle may be a hoax.
- EURUSD may pull back to 1.0865 and 1.0905.
Weekly fundamental forecast for dollar
Donald Trump has not yet won the U.S. presidential election, Reuters’ insider information about the acceleration of the ECB’s monetary expansion cycle may be a hoax, and the German economy is not as hopeless as expected. These factors allowed EURUSD sellers to start locking in profits on shorts ahead of U.S. employment data and U.S. presidential elections. The euro returned above $1.0805, which increases the risks of a correction or consolidation.
One may think that talks of American exceptionalism and divergence in economic growth should become louder as the Eurozone’s composite PMI has been below the critical level of 50 for the second month on the back of the U.S. purchasing managers’ index rising to 54.3. Moreover, the IMF raised its forecast for the U.S. while downgrading projections for the Eurozone, noting that the gap will likely widen due to differences in labor productivity. However, investors noted positive changes in the German economy. German business activity exceeded forecasts, and Deutsche Bank pointed out that industrial production is not in free fall, suggesting that the government’s recession warnings may be overstated.
Dynamics of German and French business activity
Source: Bloomberg.
If the Eurozone’s leading economy shows signs of life, why accelerate the ECB’s monetary expansion cycle? Joachim Nagel, president of Deutsche Bundesbank, argues that the central bank should not rush to cut rates. Belgium’s Pierre Wunsch does not understand why a 50 bp rate cut should be discussed in December, while Governor of the Bank of Estonia Madis Müller does not think the European regulator is behind the curve. Gabriel Makhlouf says the ECB will need powerful data for a big move.
The previous day, an insider report from Reuters revealed the ECB’s readiness to accelerate its easing cycle, which sent EURUSD below 1.08. If this is a hoax, is it time to buy euros? The cost of hedging the risk of the regional currency’s decline has soared to its highest levels since the 2017 French elections. It looks overpriced.
Dynamics of Euro relative hedging costs
Source: Bloomberg.
As soon as Donald Trump began to lead the presidential polls, investors rushed into the Trump trade. Standard Chartered estimates its contribution to the U.S. dollar’s strength in October at 60%. The Greenback was poised for its best monthly performance in two years, but the fact that the Republican has yet to win has dampened the EURUSD bears.
Weekly trading plan for EURUSD
Profits on shorts are being locked in, creating a good foundation for a pullback or consolidation. Sellers will likely use EURUSD‘s rally to 1.0865 and 1.0905 to ramp up short positions. I believe there is no point in getting too enthusiastic about purchases from 1.0805.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.