Looking at the weekly chart of the EUR/USD pair, we can see that the bears have clearly dominated over the past two weeks. In mid-August, the pair confidently overcame the parity level, and actually consolidated under the 1.0000 mark last week. Bulls have repeatedly tried to settle above this target, but in vain: the fundamental background "favored" the US currency, while putting pressure on the euro. Most likely, bearish sentiment will prevail in the pair next week as well. But at the same time, it is worth remembering that after such rapid and protracted recessions, as a rule, a corrective rollback follows. And in this case, the need for correction is not only ripe, but, in my opinion, overripe. Moreover, there are several fundamental reasons for this.
So, amid high-profile events last week (Federal Reserve Chairman Jerome Powell's speech, release of the PCE index), the information that the European Central Bank is ready to discuss more aggressive rates of monetary tightening remained in the shadows. This is unofficial information, but it was relayed by journalists from the influential Reuters news agency, citing their sources. According to them, "many ECB politicians" are planning to discuss the issue of raising the rate by 75 basis points at the September meeting "due to the worsening inflation outlook." Notably, these (unnamed) representatives of the ECB emphasized that the looming recession in the eurozone "will not slow down or stop the normalization of the ECB's policy."
In the context of the published information, special attention should be paid to the speech of the member of the ECB Executive Board, Chief Economist Philip Lane, who will announce his stance on Monday. If he also toughens the tone of his rhetoric, the EUR/USD bulls will get a formal reason to organize a corrective counteroffensive.
It is also necessary to take into account that preliminary data on inflation growth in the eurozone for August will be published on Wednesday. The released numbers could also trigger a correction, especially in light of the above hawkish rumors. For example, the general consumer index in August may again rush upward, having already overcome the 9% mark (it was at the level of 8.9% in July). This will be another historical record - the highest value of the indicator in the entire history of observations (since 1997). The core consumer price index (excluding volatile energy and food prices) should also show strong momentum, climbing to 4.1%.
The day before the release of European inflation, a report on the growth of the German CPI will be published. Inflation in Germany should similarly show strong momentum. According to general forecasts, the general index may rise in August to 7.8% (y/y), the harmonized index - up to 8.7% (y/y). If this turns out to be in the green zone, then traders may decide to correct EUR/USD even before the release of European inflation.
Political news can also provide situational and short-term support for the euro. On Saturday, it became known that Serbia and Kosovo still agreed on entry documents. This was announced by the head of European diplomacy Josep Borrell.
Let me remind you that at the end of July, the situation began to actively escalate on the border between Serbia and Kosovo due to the decision of Pristina to oblige Serbs to obtain a temporary document on crossing the border when entering the (unrecognized by many countries of the world) republic.
Serbian documents in Kosovo wanted to be considered invalid from August 1. But after negotiations, the escalation was avoided: the introduction of the ban was postponed until September 1. Ahead of this date, the Kosovo authorities took a more categorical position, declaring that they would not make any further delays. Preliminary talks between the parties, which were held in Brussels, did not lead to anything. Therefore, even on Friday, the European media warned that in early September, the Serbian-Kosovo smoldering conflict could flare up again. The euro was under additional pressure, amid another political aggravation in the Balkans.
But on Saturday, Borrell announced a compromise had been reached. According to him, as part of the EU-supported dialogue, Serbia agreed to cancel entry/exit documents for Kosovo ID card holders, and Kosovo agreed not to introduce them for Serbian ID card holders.
Taking into account the fact that on Friday the situation was "on the verge of a foul", and on the weekend the parties came to a compromise, we can assume that EUR/USD bulls will try to use this newsbreak to their advantage.
Thus, after a two-week protracted and almost recoilless decline, a corrective rollback can be expected for the pair. But here it should be remembered that the general fundamental picture is now conducive to further strengthening of the dollar. Powell was hawkish on Friday, raising the possibility of a 75-point rate hike in September and possibly November. This factor will keep dollar bulls in good shape. The euro, in turn, will remain under pressure from the energy crisis (which will only get worse closer to autumn). Therefore, corrective upward momentum for the EUR/USD pair should be used as an excuse to open short positions. Downward targets - 1.0000 (if the corrective momentum flares up and fades around 1.0050) and 0.9950. The main target is 0.9910, which corresponds to the lower line of the Bollinger Bands indicator on the daily chart.
