At the beginning of this week's trading the price of the EUR/USD currency pair may continue to move downward until the reaction to the announcement of the American inflation figures. The price of the EUR/USD remained stable around Support level 1.0700 until the arrival of those important and influential data and events.
The global economy is shifting towards a higher period for a longer period of time for interest rates, making the next wave of monetary decisions throughout the developed world pivotal in mapping that phase. In the coming days, borrowing costs will be determined for seven of the ten most traded currencies in the world. This is including the dollar and the euro - as a picture of policy contraction emerges for a long time. There is excitement about the outcome of some of these decisions, as the European Central Bank meeting on Thursday is very close to being decided. But there is a growing consensus that even those expected to remain on hold, such as the US Federal Reserve Bank, will be keen to boost inflation watchfulness after tapering in 2021.
The topic of "higher for longer" was the main topic of discussion among policymakers at last month's Federal Reserve meeting in Jackson Hole, Wyoming. While the start of the sharpest tightening cycle in a generation differed across the Atlantic, a more unified sense of purpose has now emerged as the prospect of an end to these rate hikes emerges.
First up will be the European Central Bank, whose policymakers face a crucial decision tomorrow, Thursday, on whether to continue raising interest rates or enact a temporary pause. Economists are almost equally divided about the result. The money markets put a 40% chance for the tenth consecutive increase to 4%, down from more than 60% last month, as traders seized on data indicating a weak German economy. A final increase of a quarter of a percentage point has not been completely ruled out, with odds in favor of such a move by the end of the year.
Regardless of which option President Christine Lagarde and her colleagues choose, the most difficult challenge will be to convince the financial markets that they will maintain their strict policies as long as there is a need to tame prices even as economic growth falters. It can build on the foundations that French board member François Villeroy de Galhau began to lay as early as January, when he claimed that the time interest rates remain high "is at least as long as" the actual level. He even now insists that "duration is more important".
Technical analysis of the euro against the dollar:
- The price of the EUR/USD currency pair continues its downward trend, connecting its highs and lows since late July with the downtrend line that is about to be tested again.
- A Fibonacci retracement tool shows additional levels that sellers may be waiting for.
- The 50% Fibonacci level lines up with the trend line around the 1.0815 mark and the dynamic inflection point of the 100 SMA.
- The higher correction may reach the 61.8% level near the 1.0850 secondary psychological barrier, but this may be the dividing line for the bearish pullback.
The 100 SMA falls below the 200 SMA to confirm that the overall trend is still bearish or that selling is likely to resume rather than reverse. In addition, the stochastic indicator is approaching the overbought zone to reflect the exhaustion of the buyers, so the downward trend will confirm the control of the sellers. The RSI has more room to rise before reaching overbought territory, so there may be some upside pressure left in the move for a bigger correction.
Today the US dollar could take cues from the US CPI report, as the strong reading may bolster expectations of Fed tightening, even after the Federal Open Market Committee's FOMC meeting in September.
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