The EUR/USD pair has set a new price low for the year, dropping to 1.1568. The price has not fallen below this target since July 2020. Judging by the strength of the downward trend, the bears will soon update this price low, as the nearest support level is located at 1.1540 (the lower line of the Bollinger Bands indicator coinciding with the lower boundary of the Kumo cloud on the weekly chart). Before this price barrier, as they say, "just around the corner", so there is now an absentee discussion among experts about what mark the greenback will stop at. According to some analysts, the dollar paired with the euro will circle around the target of 1.1540. According to other currency strategists, it is now possible to talk about the prospects of a decline in the area of the 14th figure. In my opinion, an additional 100-point price reduction looks quite feasible, especially if the September Nonfarm, which will be published next Friday, will not disappoint traders.
However, the next Nonfarm is still a week away, and the dollar is strengthening its position right now. This is facilitated by many fundamental factors that are more or less interconnected. Thus, a barrel of Brent crude oil continues to precipitate the $80 mark, demonstrating the strength of the uptrend. In this regard, investors' fears about another jump in inflation in the United States have intensified. These concerns were expressed in the sale of government bonds, which is why their yields went up again. In particular, the yield of 10-year securities this week reached a three-month high of 1.546%.
In addition, the hawkish expectations of traders regarding the Federal Reserve's further actions have been increasing recently. The central bank has already announced that it will start curtailing QE earlier than expected (in November). But, as you know, "appetite comes with eating" - now the market is discussing the prospects of raising the rate next year. The head of the St. Louis Federal Reserve, James Bullard, also added fuel to the fire, who recently announced that he expects a double rate hike in 2022. This statement could be treated with a certain degree of skepticism (Bullard is a consistent hawk), if not for the median forecast of the Fed, which was updated at the last meeting. The dot plot of forecasts showed that 9 out of 18 members of the Committee expect an increase in the base rate in 2022. Moreover, three of them assume that the rate will be increased twice next year. A rate increase in 2023 is expected by 17 of the 18 members of the Fed, in 2024 – all 18.
In other words, the results of the September meeting laid the foundation for strengthening the US currency. All subsequent events that took place after the September meeting were considered and are being considered by the market through the prism of prospects for tightening monetary policy.
In September, Fed Chairman Jerome Powell repeated the mantra several times that the increase in inflation is temporary. In his opinion, the surge in prices occurred due to limited supply amid very high demand. However, during his recent speeches, he has already begun to express concern that inflation indicators remain at a high level. In particular, speaking to congressmen, he said that "the current increase in inflation is of greater concern than in the first half of the year." At the same time, he suggested that problems with supply chains will continue next year. According to a number of analysts, the Fed will have to raise the rate next year in response to the recovery of the labor market and increased price pressure.
The current macroeconomic statistics also speak in favor of a further decline in EUR/USD. In particular, the third (final) assessment of the growth of the US economy in the second quarter was published today. According to published data, the country's GDP growth was 6.7% (the initial estimate was at 6.6%). The GDP price index increased by 6.2% (6.1% earlier), the base RCE - by 6.1%.
The European currency, in turn, today found itself under pressure from macroeconomic reporting. German inflation surprised with rather weak figures, which became a harbinger of weakening of pan-European inflation. So, in monthly terms, the overall consumer price index sharply fell in September, collapsing to zero (with a forecast of growth up to 0.2%). On an annualized basis, the indicator also came out in the red zone, ending up at 4.1% with a forecast of growth up to 4.5%. The regional reports of the German CPI reflected the widespread deterioration of inflation indicators in monthly terms. The harmonised German consumer price index also showed a rather weak result, both in monthly and annual terms.
Thus, the potential for a decrease in EUR/USD is still not exhausted. The technical side of the issue also speaks of the priority of short positions: the price is located between the middle and lower lines of the Bollinger Bands indicator, as well as under all the lines of the Ichimoku indicator, which demonstrates the bearish "Parade of Lines" signal. The first target of the downward movement is 1.1540 (the lower line of the Bollinger Bands indicator, which coincides with the lower border of the Kumo cloud on the weekly chart). When this target is overcome, the main price barrier will be 1.1500.
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