During the last three trading sessions last week, the EUR/USD price succeeded in rebounding higher with gains that reached the level of 0.9854. This is after the EUR/USD pair fell to its lowest level in 20 years, reaching the 0.9535 support level. The clear contrast in the future of tightening monetary policy is still in favor of a strong US dollar. The European Central Bank (ECB) is expected to release "into effect" in response to double-digit eurozone inflation data, but that will provide little support to euro exchange rates, analysts say. Eurozone CPI inflation surprised to be 10% year over year in September, ahead of expectations of 9.7% and up from 9.1% in August.
Statistics office Eurostat said the rally was driven by a 1.2% month-on-month gain, doubling a 0.6% gain in August. Higher gas prices are the main reason, with the Netherlands reporting an incredible increase of 17.1% for the month of September. However, mounting price pressures were observed across the board, not just in energy, which led the market to price a more aggressive response at the European Central Bank in October of this year.
Commenting on the figures, Chris Turner, analyst at ING Bank, said: "Such a figure should come out strongly from the European Central Bank and prove expectations of a 75 basis point hike on October 27." However, the Euro was not supported by the data, as it lost ground against the British Pound and the Dollar on Friday. The lack of reaction confirms that expectations of a rate hike do not have an impact on the euro exchange rates as was the case in the past. The analyst added, “Short-term interest rate differentials have had little impact on EUR/USD rates lately. The rebound in the EUR/USD pair over the past 24/48 hours may be indicative of the sterling’s recovery.”
For her part, Asmara Jamala, an economist at the Italian lender Intesa Sanpaolo, says that accelerating the ECB's rate hike path - in response to inflation data - "should not be enough - alone - to protect (the euro) from renewed weakness,"
Energy Prices Rose in September
The energy prices accounted for the majority of the inflationary push in the Eurozone. Food prices were also notable after an 11.8% increase. Prices of consumer durables rose 5.6%, reflecting the rise in the core CPI from 4.3% in August to 4.8% in September. Commenting on the figures, Ulrike Kastens, European economist at DWS Group, said, “The European Central Bank will be watching this particularly closely, as the price trend continues to widen,” adding that leading indicators such as producer prices and opinion polls on price developments suggest that the end is over. However, inflation could peak in the coming months, according to DWS, and planned German gas brakes are likely to contribute to that. However, the failure to meet the inflation target is still expected to continue. Therefore, monetary policy normalization alone is not sufficient in this environment.”
From the US, the core PCE price index for August exceeded the expected change (MoM) by 0.5% with a change of 0.6%. The equivalent (y/y) also beat expectations of 4.7% with a change of 4.9%. On the other hand, the general PCE price index for the period fell below expectations (on an annual basis) of 6.6% with a change of 6.2%, while the equivalent (monthly) was in line with the consensus estimate of 0.3%.
Technical analysis of the EUR/USD pair:
- In the near term and according to the performance on the hourly chart, it appears that the EUR/USD is trading within an ascending channel formation.
- This indicates a significant short-term bullish momentum in market sentiment.
- Therefore, the bulls will target short-term profits at 0.9882 or higher at 0.9980.
- On the other hand, the bears will target potential pullback profits at around 0.9728 or lower at 0.9629.
In the long term and according to the performance on the daily chart, it appears that the EUR/USD is trading within the formation of a descending channel. This indicates a significant long-term bearish momentum in market sentiment. Therefore, the bears will be looking to take out on the extended dips around 0.9541 or lower at the 0.9297 support. On the other hand, the bulls will target long-term profits at around 1.0075 or higher at 1.0365.
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