The EUR/USD exchange rate has not had much cause for cheer lately, but there is a possibility that it will benefit significantly in the coming weeks if the People's Bank of China (PBoC) remains serious about stabilizing the closely-linked renminbi in the direction of a very important event on the political calendar Chinese.
- At the beginning of this week's trading, the EUR/USD pair rose towards the resistance level 0.9835, amid a temporary halt to the US dollar's gains.
- The euro's gains are still facing pressure factors, most notably the consequences and developments of the ongoing Russian-Ukrainian war.
Last week's sabotage of Nordstream's pipelines has intensified the energy headwinds facing Europe's economies at a time when the mounting inflation problem is increasing pressure on the European Central Bank (ECB) regarding negative outcomes for the single European currency. These developments have emboldened the already bearish analyst community as some forecasters are now looking for the euro to shed another 8% by the end of the year, which should take the euro's losses to more than 20% for 2022.
Jordan Rochester, forex analyst at Nomura wrote, “We expect EUR/USD to head to 0.90 by the end of the year and GBP/USD to fall to 0.975 over the same period: big moves with several Risks along the way,” the analyst added, “Our view is largely driven by: 1) a collapse in Europe’s trade balance and regime change relative to the US dollar, with US exports of oil and LNG increasing; 2) lower global growth prospects weigh on pro-cyclical currencies (eg Sterling) and 3) higher credit risks and upcoming market pressures.”
But despite the generally perceived bearish outlook, there may be room for the EUR to benefit in the short term from any potential attempts by the People's Bank of China (PBoC) to stem the renminbi's decline during the current Golden Week holiday. It leads to a very important political event in the middle of the month. It came after Reuters cited four sources last Thursday to report that China's state-owned banks have been instructed to prepare to sell dollars in order to prop up the renminbi, which could have implications for other parts of China's foreign exchange trading system (CFETS).
Thursday's Reuters report is just one of several indications that the People's Bank of China's tolerance for renminbi losses has all but evaporated and given the extent to which the Chinese currency can influence others, this is a potentially positive development for the euro. “There was talk in the market last week of Chinese banks asking to keep the USD/CNH exchange rate close to the daily peg as Beijing continues to tilt against the upside,” says Alvin Tan, RBC currency analyst.
Speculation about a possible intervention came after a prolonged depreciation of the renminbi and comes at a point in the local calendar where local policy makers are likely to want to encourage stability in the floating managed renminbi pool. It also comes at a time when the dollar is rising near two-decade highs against many currencies and speculators are sitting on top of large "long" positions or bullish bets on the US currency, which could leave the dollar vulnerable to profit-taking by speculative short-term gamblers.
EURUSD Technical Analysis Today:
EUR/USD is still in correction mode and is approaching the area of interest at parity or 1.0000. The Fibonacci retracement tool shows additional resistance areas.
- The pair is currently testing the 38.2% Fibonacci retracement level around the key 0.900 psychological level, but a higher correction may be due.
- The 50% Fibonacci level is at 0.9887 and the 61.8% level is at .9950 minor psychological resistance, which is close to the falling trend line.
In addition, the 50% Fibonacci level is near the 100 SMA dynamic inflection point while the 61.8% level lines up with the 200 SMA dynamic resistance. If any of these factors hold as an upward barrier, EUR/USD may resume falling to the swing low of 0.9530. So far the 100 SMA is below the 200 SMA to confirm that the general trend is still bearish and that selling is more likely to resume than reverse. Stochastic is also turning lower after reaching the overbought zone, reflecting the rising selling pressure.
It appears that the RSI is ready to drift lower without reaching the overbought territory, indicating that the bears are eager to take the reins.
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