The euro-dollar pair updated its monthly price high yesterday, approaching the 1.0700 resistance level. However, buyers hesitated to storm the 1.0700 resistance level, even in the face of the overall weakening of the greenback.
Overall, the current situation eloquently demonstrates how vulnerable and dependent the American currency is on risk sentiment levels. As soon as risk appetite increased, the dollar came under significant pressure across the market, including against the euro. The cause for optimism was events in the Middle East, or rather, the absence of such events. Israel postponed a ground operation in the Gaza Strip, and there are increasing reports in the media suggesting that the country’s military and political leadership may even abandon the risky mission entirely. Additionally, it was reported yesterday that Hamas had released two Israeli hostages.
The lack of escalation in the conflict and the initial steps toward de-escalation increased interest in risk assets in the markets, particularly demonstrated by the rising dynamics of U.S. stock index futures, while the safe-haven dollar remained out of favor. This suggests that emotional dollar growth, driven solely by geopolitical factors, should not be trusted, as it is a very fragile and rapidly changing information environment.
Today, EUR/USD sellers are regaining lost positions, primarily due to the weakening euro. The single currency reacted negatively to the PMI indices published in key European Union countries. In most cases, the indicators came out in the “red zone,” reflecting a worsening situation in the services and/or manufacturing sectors. It cannot be said that today’s reports play a decisive role. Not at all. The results of the ECB’s October meeting, which will be announced the day after tomorrow, are practically predetermined: the regulator will maintain all parameters of monetary policy unchanged. Weak PMI indices may only soften some formulations in the accompanying statement but nothing more.
Nevertheless, the fact remains: today’s release halted the “locomotive” that was heading up on all pairs, reaching the 1.0700 level.
First and foremost, German data disappointed. The business activity index in the German manufacturing sector remained significantly below the key 50-point mark (40.7). The German business activity index in the services sector also failed to stay above this target. If in September this indicator was at 50.3, in October it sharply dropped to 48 points (with a forecast of a decline to 50.1). Overall European indices also entered the “red zone.” In the manufacturing sector, the PMI plummeted to 43.0, and in the services sector, it fell to 49.2 points (the lowest value since January of this year).
It is evident that such weak PMI data is not the best backdrop for EUR/USD buyers, especially considering the upcoming meeting of the European Central Bank. On one hand, the outcome of the October meeting is already predetermined: the ECB will keep interest rates unchanged, following their unexpected increase in September. The key lies in the subsequent rhetoric in the accompanying statement and ECB President Christine Lagarde’s commentary.
If concerns about a possible recession grow and the firm and unwavering assurances that the ECB will keep rates at their current level for a long time no longer sound so “firm and unwavering” (meaning the corresponding phrase in the accompanying statement will be rephrased), then the euro, as well as the EUR/USD pair, will come under pressure. However, if the European Central Bank maintains its previous determination and allows for rate hikes (in the case of accelerating inflation), the pair may resume its upward trajectory.
It’s worth noting that the dollar came under pressure not only due to the decline in risk sentiment. Another factor came into play: a decrease in the yield of U.S. Treasury bonds. The yield on the 10-year Treasury bond approached the 5% mark last week, setting a 16-year record. As of today, this indicator has dropped to 4.85%. The decrease in yield is due to the weakening hawkish expectations regarding the Fed’s future actions. The probability of a rate hike in November has dropped to zero, and the probability of balance sheet reduction in December has decreased to 24%.
The cautious comments from Fed Chairman Jerome Powell are to blame. In his speech at the Economic Club of New York last week, Powell cast doubt on the advisability of further interest rate increases. At the same time, he focused his attention on the decline in core inflation and the side effects of aggressive policies. If the core PCE index for September again demonstrates a downward trend (the release is scheduled for Friday, with a forecast of 3.7%), the probability of a December rate hike will decrease to 10-15%, and the dollar will come under additional pressure.
Overall, the current fundamental picture does not favor the U.S. currency. Only a surge in risk-off sentiment could help EUR/USD bears push back toward the 1.05 level, either due to escalation in the Middle East or a government shutdown (still more than three weeks away from the “X-hour”). If events in the Middle East unfold according to a de-escalation scenario, the EUR/USD pair will again try to approach the 1.07 level (the upside target is 1.0750, which is the lower boundary of the Kumo cloud on the D1 timeframe). But considering long positions is advisable only after buyers establish themselves above the 1.0670 resistance level (the upper line of the Bollinger Bands indicator on the daily chart). As we can see, yesterday’s attempt ended in failure: sellers took the initiative, taking advantage of the euro’s weakness in light of disappointing PMI data.
The material has been provided by InstaForex Company – www.instaforex.com
The euro-dollar pair updated its monthly price high yesterday, approaching the 1.0700 resistance level. However, buyers hesitated to storm the 1.0700 resistance level, even in the face of the overall weakening of the greenback.
Overall, the current situation eloquently demonstrates how vulnerable and dependent the American currency is on risk sentiment levels. As soon as risk appetite increased, the dollar came under significant pressure across the market, including against the euro. The cause for optimism was events in the Middle East, or rather, the absence of such events. Israel postponed a ground operation in the Gaza Strip, and there are increasing reports in the media suggesting that the country’s military and political leadership may even abandon the risky mission entirely. Additionally, it was reported yesterday that Hamas had released two Israeli hostages.
The lack of escalation in the conflict and the initial steps toward de-escalation increased interest in risk assets in the markets, particularly demonstrated by the rising dynamics of U.S. stock index futures, while the safe-haven dollar remained out of favor. This suggests that emotional dollar growth, driven solely by geopolitical factors, should not be trusted, as it is a very fragile and rapidly changing information environment.
Today, EUR/USD sellers are regaining lost positions, primarily due to the weakening euro. The single currency reacted negatively to the PMI indices published in key European Union countries. In most cases, the indicators came out in the “red zone,” reflecting a worsening situation in the services and/or manufacturing sectors. It cannot be said that today’s reports play a decisive role. Not at all. The results of the ECB’s October meeting, which will be announced the day after tomorrow, are practically predetermined: the regulator will maintain all parameters of monetary policy unchanged. Weak PMI indices may only soften some formulations in the accompanying statement but nothing more.
Nevertheless, the fact remains: today’s release halted the “locomotive” that was heading up on all pairs, reaching the 1.0700 level.
First and foremost, German data disappointed. The business activity index in the German manufacturing sector remained significantly below the key 50-point mark (40.7). The German business activity index in the services sector also failed to stay above this target. If in September this indicator was at 50.3, in October it sharply dropped to 48 points (with a forecast of a decline to 50.1). Overall European indices also entered the “red zone.” In the manufacturing sector, the PMI plummeted to 43.0, and in the services sector, it fell to 49.2 points (the lowest value since January of this year).
It is evident that such weak PMI data is not the best backdrop for EUR/USD buyers, especially considering the upcoming meeting of the European Central Bank. On one hand, the outcome of the October meeting is already predetermined: the ECB will keep interest rates unchanged, following their unexpected increase in September. The key lies in the subsequent rhetoric in the accompanying statement and ECB President Christine Lagarde’s commentary.
If concerns about a possible recession grow and the firm and unwavering assurances that the ECB will keep rates at their current level for a long time no longer sound so “firm and unwavering” (meaning the corresponding phrase in the accompanying statement will be rephrased), then the euro, as well as the EUR/USD pair, will come under pressure. However, if the European Central Bank maintains its previous determination and allows for rate hikes (in the case of accelerating inflation), the pair may resume its upward trajectory.
It’s worth noting that the dollar came under pressure not only due to the decline in risk sentiment. Another factor came into play: a decrease in the yield of U.S. Treasury bonds. The yield on the 10-year Treasury bond approached the 5% mark last week, setting a 16-year record. As of today, this indicator has dropped to 4.85%. The decrease in yield is due to the weakening hawkish expectations regarding the Fed’s future actions. The probability of a rate hike in November has dropped to zero, and the probability of balance sheet reduction in December has decreased to 24%.
The cautious comments from Fed Chairman Jerome Powell are to blame. In his speech at the Economic Club of New York last week, Powell cast doubt on the advisability of further interest rate increases. At the same time, he focused his attention on the decline in core inflation and the side effects of aggressive policies. If the core PCE index for September again demonstrates a downward trend (the release is scheduled for Friday, with a forecast of 3.7%), the probability of a December rate hike will decrease to 10-15%, and the dollar will come under additional pressure.
Overall, the current fundamental picture does not favor the U.S. currency. Only a surge in risk-off sentiment could help EUR/USD bears push back toward the 1.05 level, either due to escalation in the Middle East or a government shutdown (still more than three weeks away from the “X-hour”). If events in the Middle East unfold according to a de-escalation scenario, the EUR/USD pair will again try to approach the 1.07 level (the upside target is 1.0750, which is the lower boundary of the Kumo cloud on the D1 timeframe). But considering long positions is advisable only after buyers establish themselves above the 1.0670 resistance level (the upper line of the Bollinger Bands indicator on the daily chart). As we can see, yesterday’s attempt ended in failure: sellers took the initiative, taking advantage of the euro’s weakness in light of disappointing PMI data.
The material has been provided by InstaForex Company – www.instaforex.com
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