Oct 15, 2022
VOT Research Desk
Market Analytics and Considerations
The US Consumer Price Index dropped less than what was predicted, and the Fed followed a similar course.
Europe is in disarray as relations with Russia grow and the number of AIDS cases rises.
The EUR/USD currency pair continued on its path to new annual low points as the week came to a close.
The EUR/USD pair is trading at roughly 0.9730 as the day comes to a close, remaining flat for the week. In general, volatility was low throughout the first half of the week as market participants awaited major US events. The various pronouncements sparked some erratic trading across financial boards but were unable to change the USD direction.
The US Federal Reserve and price growth
Inflation and central banks’ efforts to control it have been the main issue for the majority of the year, and tensions increased ahead of the FOMC Meeting Minutes and the US Consumer Price Index. The well-known hard line statements made by the US Federal Reserve (Fed) had little effect on the EUR/USD exchange rate. The restrictive monetary policy would be maintained, policymakers reaffirmed, in order to curb the high inflation. Officials became a little more hawkish, stating that it would be appropriate to maintain the situation at that level for a while after they reach what they view as a restricted level.
In terms of inflation, the US CPI increased by 9.1% YoY in June, setting a record-high and compelling the US Fed to continue raising interest rates by 75 basis points every meeting. The annual inflation rate in September was 8.2%, lowering for a third month in a row but falling short of the market’s forecast of 8.1%. The core price index, which does not include volatile food and energy costs, increased by 6.6% YoY, a level not seen in more than a decade.
The statement reversed the irrational price movement, initially bringing the EUR/USD to a new weekly low before surging to new weekly highs. The US indexes fell to new yearly lows as a result of investors fleeing high-yielding assets in a panic. However, the USD weakened as investors recognized the Fed would stick to its course. Wall Street jumped, and in just a few hours, EUR/USD gained around 200 pips.
The news from Europe was much less favorable. The hostilities between Russia and Ukraine are rising, with Moscow launching huge attacks on its neighbor and threatening to start a third world war should Ukraine join NATO. Due to Russia’s decision to stop supplying gas to the Old Continent due to the ongoing war, the region is currently dealing with skyrocketing costs and shortages in advance of the winter..
Inflation that has gotten out of hand also exists in Europe. Last Monday, Germany announced that annual inflation in the EU-harmonized measure increased by 10.9% in September. The European Central Bank (ECB), however, is treating quantitative tightening with a lot more scepticism than the Fed is. In September, the ECB released the brakes by 75 basis points, although this is more likely to be the exception than the rule. The central bank has raised rates twice this year for a total of 125 basis points, significantly less than the Fed’s 300 basis points. Before the end of the year, the Fed and the ECB will hold two more monetary policy meetings each.
And to top it all off, there is a fresh coronavirus outbreak in the EU. Governments have not yet taken any action beyond stepping up their immunization efforts and issuing winter safety warnings. German regulations governing the use of masks in public transportation and the healthcare system have been restored. Regular tests and a more widespread mask mandate are two more measures that are currently being examined.
The approaching week will bring us some intriguing data from the European Union. The EU will present the final reading of its September Consumer Price Index while Germany will present the results of its October ZEW Survey on Economic Sentiment. Additionally, the nation will release October Consumer Confidence, which was earlier at -28.8. There are no pertinent events on the US macroeconomic calendar, but there are a few minor reports that could provide some indication of how the economy is doing.
Technical prognosis for EUR/USD
Little substance for a EUR/USD rally is provided by the macroeconomic scenario. How about the technical one, though?
The pair has indeed recorded a lower low and a lower high, which is typically interpreted as a bearish indicator, according to the weekly chart. Technical indicators continue to be in the red, with the RSI crunching downward at approximately 29 while the Momentum is correcting upward. The same chart demonstrates that the pair, which is presently trading at approximately 0.9990, is still below a falling trend line drawn from this year’s high at 1.1494 while the 20 SMA continues to run parallel to the trend line, a few pips above it, signaling continued selling interest.
The daily chart reveals that traders started to show up recently at a weak 20 SMA, which is currently at about 0.9790. Above it, the broader moving averages continue to move south in keeping with the prevailing trend. Momentum indicator is now still in positive territory with a slight bullish slope, but RSI indicator is already moving downward and below its midline, trying to skew the risk to the south without actually validating it.
If the weekly low at 0.9630 is broken, there may be a further slide with a test of the 2022 low at 0.9535 as the next target. The 0.9400 level is the next significant support level and a significant bearish trigger below the latter. A correction rally might be initiated by steady advances over 0.9800, but the closer the pair comes to the aforesaid trend line, the greater the likelihood of a significant reversal.
Given that the bulk of the experts surveyed are betting on lower tiers, the EUR/USD will probably start falling again the next week. This attitude is present in both the monthly and quarterly perspectives. The likelihood of a breach through 0.9535, the cross low set this month, grows as the pair is typically seen staying above 0.9700 in the short term but below the level following.
The prospective objectives are roughly evenly distributed and not too far from the present price zone, thus the short-term moving average lacks any discernible directional power. The monthly moving average, which has the most pronounced bearish slope, is among the larger moving averages. In line with a break of the 2022 annual low, the same demonstrates that the majority of targets in the three-month view aggregate between 0.9200 and 0.9800.
