Overview of the EUR/USD pair. September 1st. ECB protocol – there is little optimism for the euro
September 1, 2023 8:23 am
On Thursday, the EUR/USD currency pair unexpectedly (from a technical point of view) began to decline. Recall that the price had settled above the moving average line just a day earlier, which should have meant a continuation of the rise of the European currency. However, we had repeatedly warned that this week’s macroeconomic backdrop is very strong, so movements can be in various directions. It was only possible to predict, as one can know the outcome of any given report in advance. So, yesterday’s decline might seem illogical, but from a macroeconomic perspective, everything is fine.
The key report of the previous day was European inflation. The decline of the European currency started even at night, suggesting an earlier reaction to the report. Perhaps the market received insider information, or most participants believed a sharp decline in the Consumer Price Index (CPI) was unlikely. After all, a day earlier, an inflation report was released in Germany, which provides good benchmarks for the European indicator. Either way, the decline began, and inflation in the EU did not decrease in August. This report might trigger a rise in the euro, as the ECB will now have to raise the rate for longer. However, this is not the case, and we have been saying this for several months.
First, no matter how much the rate increases in the European Union, the market has long considered all these tightenings. It accounted for all the tightening from the Federal Reserve last year. Second, the ECB physically cannot raise the rate to the level of the Federal Reserve rate because the European Union’s economy is much weaker, and plenty of countries in the alliance with weak economies cannot withstand an “ultra-hawkish” monetary policy. Besides, in the past month or so, we have regularly received signals from monetary committee members about their readiness to take a break in the autumn. Admittedly, if inflation falls slightly, a pause differs from what’s needed. In short, everything is soon pointing to the tightening cycle’s end. And for the euro, this is naturally bad news.
Dovish notes in the ECB protocol
Yesterday, the protocol of the last ECB meeting was also published. Without going into details, one can highlight the most important points contained in the document. First, many committee members do not see the need to raise the rate in September. They believe the current rate is sufficient for inflation to return to the target level over a few years. And the fact that the ECB is in no rush to return to 2% has been known for a long time. Secondly, the monetary committee agreed that the rate should only be raised if there are insufficient reasons to believe that core inflation will return to 2% in the long run. Again, we’re talking about a two- to three-year perspective.
And what conclusions can we draw? The ECB is not rushing to tighten, is not in a hurry to return inflation to 2%, and does not intend to raise rates at the expense of a recession. The European economy has been teetering on the brink of negative growth for several quarters in a row, so any new increase means a local recession will become a reality. And then a global one. Thus, the European currency is losing its main trump card in the confrontation with the dollar. No matter how this week ends, there will be only a decline in the pair. It’s not fast, maybe with frequent corrections and pullbacks, but in any case, it’s heading south. We need to see current factors that could support the EU currency.
They may appear by the end of the year if the Federal Reserve hints at an upcoming easing of monetary policy, but it’s too early to talk about this now. On the 24-hour TF, the pair rebounded from the Senkou Span B line from below, increasing the likelihood of a further fall. Today’s movements may be random and chaotic. Conclusions about direction should be made on Monday.
The average volatility of the EUR/USD currency pair for the last five trading days as of September 1 is 82 points and is characterized as “average.” Thus, we expect the pair to move between the levels of 1.0762 and 1.0826 on Friday. A reversal of the Heiken Ashi indicator upwards will signal a new upward movement.
Nearest support levels:
S1 – 1.0803
S2 – 1.0742
S3 – 1.0681
Nearest resistance levels:
R1 – 1.0864
R2 – 1.0925
R3 – 1.0986
Trading recommendations:
The EUR/USD pair has settled back below the moving average, but how it will move today is unknown. One should stay short with targets of 1.0803 and 1.0762 until the Heiken Ashi reverses upwards. Long positions can be considered in the event of a price fixation above the moving average with targets of 1.0925 and 1.0986. But much will depend on the macroeconomic statistics from overseas today.
Explanations of the illustrations:
Linear regression channels – help determine the current trend. If both are directed in one direction, the trend is currently strong.
Moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should be conducted.
Murrey levels – target levels for movements and corrections.
Volatility levels (red lines) – the probable price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator – its entry into the oversold area (below -250) or the overbought area (above +250) indicates that a trend reversal is approaching in the opposite direction.
The material has been provided by InstaForex Company – www.instaforex.com
On Thursday, the EUR/USD currency pair unexpectedly (from a technical point of view) began to decline. Recall that the price had settled above the moving average line just a day earlier, which should have meant a continuation of the rise of the European currency. However, we had repeatedly warned that this week’s macroeconomic backdrop is very strong, so movements can be in various directions. It was only possible to predict, as one can know the outcome of any given report in advance. So, yesterday’s decline might seem illogical, but from a macroeconomic perspective, everything is fine.
The key report of the previous day was European inflation. The decline of the European currency started even at night, suggesting an earlier reaction to the report. Perhaps the market received insider information, or most participants believed a sharp decline in the Consumer Price Index (CPI) was unlikely. After all, a day earlier, an inflation report was released in Germany, which provides good benchmarks for the European indicator. Either way, the decline began, and inflation in the EU did not decrease in August. This report might trigger a rise in the euro, as the ECB will now have to raise the rate for longer. However, this is not the case, and we have been saying this for several months.
First, no matter how much the rate increases in the European Union, the market has long considered all these tightenings. It accounted for all the tightening from the Federal Reserve last year. Second, the ECB physically cannot raise the rate to the level of the Federal Reserve rate because the European Union’s economy is much weaker, and plenty of countries in the alliance with weak economies cannot withstand an “ultra-hawkish” monetary policy. Besides, in the past month or so, we have regularly received signals from monetary committee members about their readiness to take a break in the autumn. Admittedly, if inflation falls slightly, a pause differs from what’s needed. In short, everything is soon pointing to the tightening cycle’s end. And for the euro, this is naturally bad news.
Dovish notes in the ECB protocol
Yesterday, the protocol of the last ECB meeting was also published. Without going into details, one can highlight the most important points contained in the document. First, many committee members do not see the need to raise the rate in September. They believe the current rate is sufficient for inflation to return to the target level over a few years. And the fact that the ECB is in no rush to return to 2% has been known for a long time. Secondly, the monetary committee agreed that the rate should only be raised if there are insufficient reasons to believe that core inflation will return to 2% in the long run. Again, we’re talking about a two- to three-year perspective.
And what conclusions can we draw? The ECB is not rushing to tighten, is not in a hurry to return inflation to 2%, and does not intend to raise rates at the expense of a recession. The European economy has been teetering on the brink of negative growth for several quarters in a row, so any new increase means a local recession will become a reality. And then a global one. Thus, the European currency is losing its main trump card in the confrontation with the dollar. No matter how this week ends, there will be only a decline in the pair. It’s not fast, maybe with frequent corrections and pullbacks, but in any case, it’s heading south. We need to see current factors that could support the EU currency.
They may appear by the end of the year if the Federal Reserve hints at an upcoming easing of monetary policy, but it’s too early to talk about this now. On the 24-hour TF, the pair rebounded from the Senkou Span B line from below, increasing the likelihood of a further fall. Today’s movements may be random and chaotic. Conclusions about direction should be made on Monday.
The average volatility of the EUR/USD currency pair for the last five trading days as of September 1 is 82 points and is characterized as “average.” Thus, we expect the pair to move between the levels of 1.0762 and 1.0826 on Friday. A reversal of the Heiken Ashi indicator upwards will signal a new upward movement.
Nearest support levels:
S1 – 1.0803
S2 – 1.0742
S3 – 1.0681
Nearest resistance levels:
R1 – 1.0864
R2 – 1.0925
R3 – 1.0986
Trading recommendations:
The EUR/USD pair has settled back below the moving average, but how it will move today is unknown. One should stay short with targets of 1.0803 and 1.0762 until the Heiken Ashi reverses upwards. Long positions can be considered in the event of a price fixation above the moving average with targets of 1.0925 and 1.0986. But much will depend on the macroeconomic statistics from overseas today.
Explanations of the illustrations:
Linear regression channels – help determine the current trend. If both are directed in one direction, the trend is currently strong.
Moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should be conducted.
Murrey levels – target levels for movements and corrections.
Volatility levels (red lines) – the probable price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator – its entry into the oversold area (below -250) or the overbought area (above +250) indicates that a trend reversal is approaching in the opposite direction.
The material has been provided by InstaForex Company – www.instaforex.com
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