On Wednesday, the EUR/USD currency pair began a new round of corrective movement while failing to update its previous local maximum. We've said before why this is important. If the previous highs are not updated, then there is no upward trend. Thus, a price reversal near the level of 1.0010 followed by a fall to the moving average line is very bad for the euro currency. However, we have already talked about the illogical growth of the pair in the last few days. We believe that the events of last week should have provoked a new powerful strengthening of the US currency, but not the growth of the European one. From our point of view, non-farms were strong enough, and the unemployment rate did not rise critically to sound the alarm and shout about a recession.
Moreover, the recession itself may still be avoided. Some forecasts say the probability of its occurrence in the coming year is no more than 35%. And a year later, the Fed may already start lowering the key rate, which will slowly accelerate the economy again.
Based on this, we believe the most logical development would be a new fall in the euro. Recall that Alan Greenspan, the former head of the Fed, believes that the US dollar will strengthen next year. Goldman Sachs lowered its 3-month forecast for the euro/dollar pair from 0.9700 to 0.9400. Thus, many significant experts do not believe that now the European currency will move to the formation of a long-term uptrend. We fully agree with this assessment because we also do not see how the euro can increase over a long distance. The Fed is not even thinking about stopping raising the rate yet, the ECB is unlikely to catch up with the Fed in terms of the rate level, and even these two factors alone suggest that the pair, at least, will not grow much and for a long time. Therefore, we believe that the decline will resume. Maybe it will no longer be large-scale and collapse, but the euro will not grow to 1.1000.
Goldman Sachs forecast the Fed rate at 5%, but this may not be the limit.
As mentioned above, almost all experts believe the Fed rate will continue to rise. The only question is to what level it will eventually grow. Recall that at the beginning of the year, the most "hawkish" member of the Fed monetary committee, James Bullard, spoke about raising the rate to 3.5%. Now no one doubts that the rate will rise to 4.75%, and some experts predict stronger growth. For example, Goldman Sachs economists believe the rate will rise to 5%. We believe that everything will depend on inflation. If it shows the same rate of slowdown as in the last two months, the Fed will receive the necessary grounds for further tightening monetary policy. Naturally, the higher the rate, the longer it will grow, and the more reason the dollar will continue to enjoy increased demand and strengthen against its competitors with lower rates.
ECB head Christine Lagarde said last week that her department also intends to continue to fight high inflation. Still, in the case of the European regulator, it is unclear how far it can go in tightening monetary policy. We have already written earlier that not all EU countries can withstand the burden on the economy in the form of a 5% key rate. Most likely, the ECB will not bring the situation to a "critical mass." We believe that the ECB will stop somewhere in the middle to slow down inflation as much as possible, but at the same time, not bring the state of weak economies to a catastrophic state. This will mean that the rate will rise to a maximum of 4%, which is unlikely enough to return inflation to 2%. Therefore, the cost of borrowing will be more expensive in the United States, and bank deposits are also more profitable in the United States. You can make elementary money by taking a European loan and placing it on a deposit in the USA. This is a joke, but cash flows can continue to flow from Europe overseas.
The average volatility of the euro/dollar currency pair over the last five trading days as of November 10 is 134 points and is characterized as "high." Thus, we expect the pair to move between 0.9897 and 1.0165 on Thursday. The upward reversal of the Heiken Ashi indicator signals the resumption of the upward movement.
Nearest support levels:
S1 – 1.0010
S2 – 0.9888
S3 – 0.9766
Nearest resistance levels:
R1 – 1.0132
R2 – 1.0254
R3 – 1.0376
Trading Recommendations:
The EUR/USD pair continues to be located above the moving average. Thus, now we should consider new long positions with targets of 1.0132 and 1.0165 in the case of a reversal of the Heiken Ashi indicator upwards. Sales will become relevant again no earlier than fixing the price below the moving average line with targets of 0.9888 and 0.9766.
Explanations of the illustrations:
Linear regression channels – help determine the current trend. The trend is strong if both are directed in the same direction.
The moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should be conducted now.
Murray levels are target levels for movements and corrections.
Volatility levels (red lines) are the likely price channel in which the pair will spend the next day, based on current volatility indicators.
The CCI indicator – its entry into the oversold area (below -250) or into the overbought area (above +250) means that a trend reversal in the opposite direction is approaching.