Throughout Tuesday, the EUR/USD currency pair continued to trade lower with minimal volatility. The price continues to correct against its recent upward movement, and we believe that this may mark the beginning of a new downward trend, which took a pause a month ago. We believe that the pair has corrected sufficiently to resume its decline. Of course, the correction might be more complex than it appears now. The market itself makes decisions regarding its movements, so we won't be surprised if we witness new upward movements. However, the fact remains: if the market intended to start a new upward trend, it would have been more active in buying the euro currency.
There haven't been any significant reasons for the euro to rise in recent days. In fact, there may be fewer reasons now. Yesterday, another European report on industrial production in Germany showed a decline. Unlike American statistics, regular disappointments from the European side don't come as a surprise. The EU's economy has been stagnant for several quarters in a row, so all major macroeconomic indicators leave much to be desired.
Regarding the technical picture, we still draw traders' attention to the double overbought condition of the CCI indicator. If such overbought conditions occurred during an upward trend, it could be assumed that after a slight pullback, the upward movement would resume. However, in this case, the overbought condition has emerged during a correction. In our view, this factor supports the idea of a medium-term downward trend resumption.
It's important to understand that a trend resumption doesn't necessarily mean an immediate drop of 500–600 points in the pair. We have set a target of $1.02, and the pair may take several months to reach that target. In other words, the decline may remain slow, but the price will continue to decrease. For traders, high volatility is preferable, but unfortunately, not many pairs and instruments offer daily "flights."
The Federal Reserve's position is gradually becoming more hawkish. To be candid, the recent comments and statements from Fed representatives have been rather perplexing. When the interest rate was at 5.5%, officials began discussing the lack of a need for further tightening. At least five members of the monetary committee voiced this perspective, instilling confidence in the market that the rate would remain unchanged until the end of the tightening cycle. This rhetoric surprised us because, over the past three months, inflation in the United States has consistently risen, now exceeding the target level by nearly double. For the first time in a while, inflation in the European Union is lower than in the United States. However, after a series of "dovish" statements, a series of "hawkish" statements have followed.
Yesterday, Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, argued that it's wiser to lean toward excessive tightening rather than insufficient. Mr. Kashkari expressed skepticism about the possibility of inflation returning to the target level at the current rate. He also has reservations about the timing of such a return. According to the banker, it's necessary to address inflation as soon as possible, and it will be difficult to achieve that with the current rate. Kashkari believes that the current economic activity in the United States and the level of inflation cast doubt on whether the regulator has done enough. Additionally, he doesn't see any signs of the economy weakening and still considers the labor market strong.
Of course, Kashkari did not promise tightening at the next meeting, but the overall monetary stance of the Fed is starting to shift toward being more hawkish, which is very favorable for the dollar, in our opinion, and it should continue to rise with fundamental support, possibly faster and stronger. We also believe that the Fed will raise the rate once or twice more. If inflation continues to rise and the state of the economy remains good, then such a decision is obvious. Naturally, talk of reducing rates in the United States is not on the table at the moment, so the "risk factor" for the dollar is not currently relevant.
The average volatility of the EUR/USD currency pair over the last 5 trading days as of November 8 is 79 points and is characterized as "average." Therefore, we expect movement in the pair between the levels of 1.0607 and 1.0765 on Wednesday. A reversal of the Heiken Ashi indicator back upwards will indicate a continuation of the upward correction.
Next support levels:
S1 – 1.0681
S2 – 1.0651
S3 – 1.0620
Nearest resistance levels:
R1 – 1.0712
R2 – 1.0742
R3 – 1.0773
Trading recommendations:
The EUR/USD pair continues to change its direction almost daily. Therefore, relying on moving averages is a challenging task at the moment. Yes, on Friday, we saw a strong increase, but it's unlikely that the upward movement will continue. Strong background conditions, which are unusual, were primarily responsible for the rise. From our perspective, it's reasonable to consider selling from the current positions, but it's important to understand that the "see-saw" movements may continue. Friday didn't fundamentally alter the nature of the pair's movement.
Explanations for the illustrations:
Linear regression channels – help determine the current trend. If both channels are pointing in the same direction, it indicates a strong current trend.
Moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction for trading.
Murray levels – target levels for movements and corrections.
Volatility levels (red lines) – the probable price channel in which the pair will trade in the next day based on current volatility indicators.
CCI indicator – its entry into the oversold area (below -250) or overbought area (above +250) indicates an impending trend reversal in the opposite direction.