FX.co ★ EUR/USD. Echo of Black Monday

For the second consecutive day, sellers of the EUR/USD pair tried to return to the 1.08 range, but for two straight days, they lacked the strength even to approach the 1.0900 target. The price stopped at 1.0904 on Tuesday, and Wednesday's low was recorded at 1.0906. As a result, the EUR/USD pair continues to trade within the ninth figure, reflecting traders' skepticism about the prospects of a downward movement. We are talking about the prospects of sustainable decline, not an impulsive drop followed by a rebound. Naturally, EUR/USD sellers can muster their strength, push through the 1.0900 target, and even reach the support level at 1.0850 (the upper boundary of the Kumo cloud on the daily timeframe) – but what next? Are the bears capable of another bearish marathon? Considering the current fundamental background, sellers can only count on a correction: there are no objective reasons to renew the downward trend.

If the Middle East flares up, the dollar will enjoy increased demand as a safe-haven asset for a while. However, there are "buts" here: market participants will assess the scale of the conflict and the prospects for further escalation in the Middle East. Suppose Iran limits itself to one attack, which goes unanswered by Israel. In that case, traders will quickly play out this fundamental factor and shift to classic fundamental factors, most of which do not favor the greenback.

The main argument against short positions on the EUR/USD pair is the emerging decorrelation of the European Central Bank and Federal Reserve rates. Black Monday played a significant (perhaps crucial) role in this, as dozens of the world's largest companies lost hundreds of billions of dollars in the global stock market crash.

The immediate trigger for the sharp collapse was the July Nonfarm Payrolls report, which raised serious concerns about a potential recession in the U.S. This report set off a chain reaction, with investors rushing to sell stocks and other assets.

But the dollar did not benefit from the situation. On the contrary, for one simple reason, the market concluded that the Fed had missed the moment when it was necessary to start lowering the interest rate. According to many traders, the U.S. central bank will ease policy at a waltz pace.

Fed funds futures now see a 65% chance of a 50 basis point cut at the Federal Open Market Committee's September meeting, according to the CME FedWatch tool. On Monday, at the peak of market turmoil, traders were almost sure this scenario would be realized (the chances were estimated at nearly 100%). As we can see, the market has cooled a bit in terms of expectations, but, firstly, traders still have a 65% chance of a 50-point cut. Secondly, the market is 100% sure that the Fed will begin to ease monetary policy in September (by reducing the rate by at least 25 points). Moreover, confidence is growing that the central bank will take another step towards monetary easing in November or December (according to some analysts – both in November and December).

In other words, market participants are 100% certain that a dovish scenario will be implemented at the September meeting—the only question is how much the rate will be cut.

However, there is no such confidence regarding the ECB. Moreover, the market has recently speculated that the ECB will not cut rates in September. Such assumptions emerged after the release of data on inflation growth in Germany and the eurozone as a whole.

In Germany, the Consumer Price Index rose by 0.3% month-on-month (in line with forecasts) and 2.3% year-on-year (with a forecast of 2.2%). The harmonized index, which is the ECB's preferred inflation indicator, increased by 2.6% year-on-year, whereas most experts had forecast a more modest rise of 2.4% (a rise of 2.5% was recorded in June).

Overall, in the eurozone, the CPI accelerated to 2.6% in July (up from 2.5% in June), while the core CPI remained at the previous month's level, namely 2.9% (with a forecast decrease to 2.8%).

All this comes against the backdrop of stronger GDP growth data for the Eurozone in the second quarter: the economy grew by 0.3% quarter-on-quarter and by 0.6% year-on-year (growth has been recorded for the third consecutive quarter).

In other words, the ECB might be able to skip the rate cut in September, especially if July's inflation data in the Eurozone is in the "green."

The Fed, on the other hand, lacks such an option. Incidentally, next week will be "marked by inflation reports": on Tuesday (August 13), the Producer Price Index will be published in the U.S.; on Wednesday (August 14) – the Consumer Price Index, on Thursday (August 15) – the Import Price Index, and on Friday (August 16) – the University of Michigan's Consumer Sentiment Index. Suppose inflation does not throw the greenback a lifeline. In that case, EUR/USD buyers will be able to consolidate above the resistance level of 1.0960 (upper Bollinger Bands line on the daily chart) and retest the 1.10 level.

Thus, I believe the pair retains the potential for further growth despite the initial bullish momentum fading. On Wednesday, the pair was consolidating, and sellers were trying to initiate a correction, but the current fundamental background indicates a preference for long positions.