With a lack of a catalyst this week on the forex market, the direction of EUR/USD may come down to which central bank can do the best job of talking down interest rate expectations
When the ECB met on October 28th, Christine Lagarde said that the only topic of discussion was “Inflation. Inflation, and Inflation”. And rightly so!! The next day the European Union released October CPI, which was 4.1% vs 3.7% expected and 3.4% in September. This was the highest reading since July 2008. Although Christine Lagarde noted that the Pandemic Emergency Purchase Program (PEPP) should end as scheduled in March 2022, she also said that they Committee will discuss post-pandemic bond buying programs at the December meeting, as inflation is expected to remain high longer than initially expected, however it is still expected to be transitory. Last week, doves were out in full force echoing the message:
- Christine Lagarde: conditions for rate hike unlikely to be met next year.
- ECB’s Mueller: inflation spike is largely temporary
- ECB’s Villeroy: reaffirms that inflation in France should go back down to below 2% next year, no need for ECB to raise rates next year
- ECB’s Schnabel: rate hike conditions unlikely to be met next year
Although inflation has risen to above 4% in Europe, the ECB Committee considers this to be temporary. Be on alert this week for more ECB comments, which are meant to keep a lid on the value of the Euro and keep expectations low for an interest rate hike.
The US Federal Reserve, on the other hand, announced at their November 3rd meeting that they would begin pulling back the reins on their bond buying program. Taping of bond buying will begin in November, at a pace of $15 billion per month. This amount will consist of $10 billion in Treasuries and $5 billion in MBS. However, Powell noted that even with the taper, Fed policy is providing strong support to the economy.
On Friday, the US released Non-Farm Payrolls. The US economy added 531,000 jobs to the economy in October and Septembers print was revised higher by 118,000 to 312,000! Unemployment rate: better. Average Hourly Earnings: better. This is all data the Fed wants to see. However, the Fed also wants the Labor Participation rate to increase. It remains at 61.6%. But the more people enter the work force will push the unemployment rate higher. (More unemployed looking for jobs/total work force). The Fed will be paying a lot of attention to this figure moving forward.
On a daily timeframe, EUR/USD has been moving lower in an orderly channel since late May after breaking below an ascending wedge near 1.2200. On Friday, the pair reached a new 15-month low at 1.1513, which was also the 161.8% Fibonacci extension from the low on October 12th to the high on October 28th. Additional support below is at the March 2020 highs at 1.1495 and the 50% retracement level from the March 2020 low to the January 6th highs near the same level. The June highs offer the next level of support at 1.1422, then the bottom downward sloping trendline of the channel near 1.1360.
On a 240-mintue timeframe, EUR/USD is near the 50% retracement level from the October 28th highs to Friday’s low at 1.1603. Above there is a confluence of resistance near the 61.8% retracement level from the same timeframe and the November 3rd highs between 1.1617 and 1.1623. However, if price moves higher, it can challenge another confluence of resistance of prior support, the October 28th highs and the 50-Day Moving Average (see daily) between 1.1673 and 1.1692.
I’d like to note that a reader pointed out to me that EUR/USD may be forming a double bottom based on recent lows and the lows from October 12th. This may be true; however, a double bottom isn’t in place until the neckline of the double bottom is broken, which is 1.1692. If the neckline breaks, the target for the double bottom will be 1.1871.
With both the ECB and the Fed both trying to talk down inflation expectations, as well as expectations for the timing of a rate hike, EUR/USD may become volatile. With a lack of a catalyst this week, the direction of EUR/USD may come down to which central bank can do the best job of talking!
By Joe Perry, Forex.com » Official Website