Yesterday, the EUR/USD pair failed to consolidate above the resistance level of 1.1680 (the upper line of the Bollinger Bands indicator on the daily chart). This fact is very indicative. It indicates that EUR/USD buyers are vulnerable even amid the general weakening of the US dollar. It is worth noting that Thursday's upward momentum was due solely to the decline in the US dollar index, which reacted to the negative data on the growth of the US economy in the third quarter. In turn, the euro did not have its own arguments for recovery.
The growth of Germany's inflation in October (which foreshadows the October growth of pan-European inflation) was leveled by the results of the meeting of the European Central Bank. Christine Lagarde maintained a "dovish" attitude and refuted the timid assumptions of some experts about the early curtailment of QE and an increase in the rate before the designated date (2024). All these factors combined suggest that the euro will continue to move on the wave of the US dollar.
However, dollar bulls are also in a somewhat confused state right now. As already known, members of the US regulator must observe a "silence regime" for 10 days before the Fed meeting and not speak in public. Therefore, traders are left alone to themselves, one-on-one with an army of specialized experts and analysts. At the same time, yesterday's data on US GDP growth discouraged market participants. The American economy slowed down – the indicator fell short even to the weak forecast value of 2.6%. Against the background of the spread of the delta strain of coronavirus, the third quarter was marked by problems in global supply chains, a shortage of raw materials, and a shortage of labor. At the same time, activity in both the industrial and consumer sectors has declined markedly due to the increase in prices for many types of goods. The real incomes of Americans also fell by 5.6%, which is primarily due to the termination of payments of "covid" benefits. Consumption growth rates have also slowed down. Another component of the release indicates a reduction in exports by 2.5% amid an increase in imports by 6.1%.
Reacting to these figures, the US dollar index sharply dropped. This indicator dived from 93.917 to 93.287 in just an hour. Dollar pairs changed their configuration accordingly, reflecting the general weakening of the US dollar. The EUR/USD pair did not stay aside, updating the monthly high (1.1693). But despite the favorable situation, the buyers of the pair did not dare to assault the level of 1.17, limiting themselves to an 80-point impulse growth. To confirm their intentions, EUR/USD bulls need not only to consolidate above the price barrier of 1.1680 but also to settle above the resistance level of 1.1710, which corresponds to the Tenkan-sen line on the weekly chart. This fact will allow potential buyers of the pair to "believe" in the viability of further upward correction.
However, traders did not even test the borders of the 17th mark yesterday. Any doubts by market participants about the upward prospects play in the US dollar's favor, although dollar bulls themselves are now preparing for the Fed's November meeting.
Several experts believe that the weakening of economic growth in the United States is temporary – the economic recovery should accelerate in the fourth quarter of this year, as well as in the first two quarters of next year. But this is just the opinion of some experts, whereas we will be able to find out the Fed's position on this issue only next Wednesday when the results of the Fed's November meeting will be announced.
It is assumed that the US regulator will not abandon its intentions to start curtailing QE in November. This event has already been widely announced, including by Jerome Powell. However, the future prospects of tightening monetary policy are an open question. It can be recalled that the "appetites" of the market have been growing over the past months: if in the summer, traders only allowed only a hypothetical probability of a rate hike at the end of 2022, then in the second half of October (before the publication of GDP growth data), hawkish expectations have increased significantly. Market participants expect a rate hike of 25 basis points in July and a second increase at the end of next year. Such bold assumptions are due to the fact that the growth in US inflation is not temporary (contrary to the opposite statements of the Fed), which means that the regulator will have to stop the inflationary dynamics by tightening monetary policy.
Speculation on this topic did not stop after yesterday's release. The opinion that the economic downturn in the third quarter is temporary is still prevailing in the market. Therefore, the US dollar index has slowed its decline today, and the EUR/USD pair has retreated from its won heights. Yesterday's release in the labor market also provided indirect support to the US dollar. The growth rate of new applications for unemployment benefits in the United States declined to the lowest level in 19 months (281 thousand). All this suggests that it is too early to abandon the US currency.
From a technical point of view, the EUR/USD pair failed to consolidate above the upper line of the Bollinger Bands indicator on the D1 timeframe. At the same time, a consolidation above the level of 1.1680 is a prerequisite for further growth in the area of 1.17. Therefore, it is extremely risky to open longs for a pair at the moment. If we consider medium-term trading (and even more so long-term), then short positions are still a priority. The first target of the downward pullback is the 1.1635 mark, where the Tenkan-sen and Kijun-sen lines joined on the daily chart. The current main target is the level of 1.1600 (the average line of the Bollinger Bands on the same timeframe).
