The EUR/USD pair continues to see a lot of noisy trading, as we are trying to work off the froth from the selling pressure. This session also had an announcement that the US is pulling diplomats from Saudi Arabia.
EUR/USD
The euro initially rallied against the U.S. dollar but gave back those gains rather quickly, as we are now getting reports out of Saudi Arabia that the Americans are pulling diplomats. That suggests more conflict between the Americans and the Iranians.
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If that ends up being the case, the German industrial base may be lacking a bit of energy this winter. Naturally, that would be very negative for the euro and perhaps the idea that the ECB would have to continue tightening its monetary policy. Remember, they recently did raise rates due to inflation, but a lack of energy is an entirely different problem.
We are currently hanging around the 1.12 level as we work off some of that froth from the oversold condition. A little bit of sideways action does make a certain amount of sense here, but at the end of the day, this looks like a sideways market trying to determine whether or not we are going to continue to see what happened previously.
Acceleration to the downside?
If we were to break down below the 1.1120 level, I think that opens up the possibility of a move down to the 1.10 level. Ultimately, this is a market that will remain very interesting to me because it could be a determination of what happens with the German economy based on energy, and the fact that inflation in the United States continues to be somewhat elevated.
The Federal Reserve is expected to hold rates this month. It is not necessarily looking to see an interest-rate differential widening here. But the question is, if the conflict in the Middle East picks back up, will traders punish Europe on its energy-dependence question? As things stand right now, I do favor the downside.
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