The EUR/USD did rally a bit during the trading session on Friday, but also gave back quite a bit of the gains to show just how weak this market is. He cannot hang on to gains for any significant amount of time, which of course makes quite a bit of sense considering what’s going on in the world. The risk aversion trait has been by far the biggest one, and therefore it makes quite a bit of sense that we would see the US dollar continue to attract a lot of inflow.
While the European Central Bank did raise interest rates by 75 basis points, the reality is that the Federal Reserve is still much stronger as far as monetary policy is concerned than the ECB, and that will more likely than not continue to be the case as the Europeans are going to have to worry about energy this winter. Furthermore, the largest economies in the European Union all seem to be slowing down at the same time showing signs of inflation. “Stagflation” is an absolute killer, and central banks are only somewhat equipped to deal with it.
Rallies Likely to be Sold
- I believe that rallies continue to get sold into, especially near the 50-Day EMA, which is almost where we got to during the trading session on Friday.
- Part of what we may have seen initially was a bit of momentum chasing and possibly even short covering from the last couple of weeks.
- Once we drift into the weekend, people would prefer to be flat as they don’t necessarily have to worry about geopolitical or economic events that could happen over the weekend.
- Keep in mind that the interest rates in America will continue to climb, and even if the ECB does choose to continue tightening, they did use the phrase "data dependent" which suggests that they are going to be short-lived with their hawkish behavior.
If we break down below the lows, then the Euro could drop down to the 0.98 level, possibly to the 0.97 level. This is a market that’s been in a downtrend for quite some time, so we might be due for a bounce, but that bounce should continue to offer opportunities to pick up “cheap US dollars.” The overall noisy behavior should continue into next week, especially as we get CPI numbers coming out of the United States.
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