The main intrigue of the upcoming week lies in a simple and logical question: will the EUR/USD pair continue its downward path or will it form a price bottom in the range of 0.9650-0.9700? Many currency strategists of large banks are confident that the "final stop" of the downward trend (at least the current cycle) is in the area of the 0.9500 target. But we are talking about a fairly wide time gap, until the New Year. If we talk about the immediate prospects, then the option of a "sideways" or an impressive correction is not excluded here, approximately to the level of parity. In general, the fundamental picture is not in favor of the single currency, so it is highly likely that the EUR/USD pair will remain under significant pressure. Therefore, any more or less significant corrective pullbacks can still be used as an excuse to open short positions.
The upcoming week is full of events, and not only of an economic nature. For example, the preliminary results of the parliamentary elections in Italy will be announced on Monday. According to opinion polls, the far-right three-party coalition led by the Brothers of Italy will get the majority of seats in parliament. This is a political force that is known for its conservatism and euroscepticism. The expected total result of the three right-wing parties is about 45%. The Italian economy is the third largest in the European Union, so the expected rise to power of euro sceptics will put additional pressure on the single currency. It can already be assumed that the new coalition will discuss fiscal policy more harshly with Brussels. Let me remind you that relatively recently – in 2019 – the EU leadership was ready to apply a disciplinary procedure against Italy due to the growth of public debt. Rome has been coordinating all controversial issues with Brussels for a long time, convincing the European Union that Italy will comply with the financial and budgetary goals that were previously set by the European Commission.
By the way, European Commission Head Ursula von der Leyen has already warned the Italian right: she said that the EC is ready to work with any democratic government of the bloc, but has "effective tools" in case things go in a "difficult direction." It seems obvious that the EU leadership feels much more comfortable with the center-left Italian governments. But now the political landscape of Italy will change dramatically, so the differences between Rome and Brussels regarding fiscal and migration policies will only intensify.
On the one hand, the results of the Italian elections are predictable – traders will not be shocked by the result. On the other hand, the very fact of the ultra-right coming to power will put background pressure on the euro. Radical statements by the leaders of the new coalition will only increase this pressure.
But the dollar in the coming week may receive support from the representatives of the Federal Reserve. Literally every day, Fed officials will voice their position. So, on Monday, Susan Collins, Raphael Bostic and Loretta Mester will speak. On Tuesday – Charles Evans and James Bullard; on Wednesday – Fed Chairman Jerome Powell (!), Mary Daly, and Michelle Bowman. On Thursday, Mester and Bullard, and finally, on Friday– Fed Vice Chairman Lael Brainard and John Williams. In other words, during the week, all key representatives of the Fed will indicate their position on the current economic situation in the context of further prospects for tightening monetary policy.
Let me remind you that the results of the September meeting of the central bank were hawkish, so the rhetoric of the Fed representatives is likely to be appropriate. At the final press conference, Powell did not talk about the pace of interest rate hikes at the two remaining meetings this year. In fact, he "tied" the pace of monetary policy tightening to the rate of inflation in the United States. However, Powell's colleagues – especially Bullard, Daly, Bowman and Mester –can concretize possible prospects. They will probably allow two more increases in 75-point increments. Such a scenario (even hypothetical) will provide significant support to the greenback throughout the market.
Also, quite important macroeconomic releases will be released in the coming week, which will undoubtedly have an impact on the EUR/USD pair.
German reports from the IFO will be published on Monday. The indicator of business environment conditions should demonstrate negative dynamics, putting additional pressure on the euro. Let me remind you that the PMI indices (German and pan-European) also disappointed EUR/USD traders with their "red color" last week.
The US will publish an indicator of consumer confidence on Tuesday. This is an important macroeconomic indicator, which is based on a survey of households about the level of confidence in the current state of the economy and development in the future. According to preliminary forecasts, it will grow to 104 points. If the forecast comes true, it will be the best result since March of this year. Also on Tuesday, attention should be paid to the volume of orders for durable goods (US) and to the release of data in the real estate sector (sales of new housing in the US).
Important inflation indicators will be published at the end of the five-day trading week. So, on Thursday we will find out data on the growth of the consumer price index in Germany. All components of the report should demonstrate positive dynamics. Preliminary data on the growth of pan-European inflation will be released on Friday. The overall CPI should rise to 9.7%, the core index to 4.7%. The above indicators may provide short-term support for the euro.
But here it should be remembered that the most important release for dollar pairs will be published on Friday – the main index of personal consumption expenditures (PCE). This is the most important inflation indicator that is monitored by members of the Fed and which can provoke increased volatility for the EUR/USD pair – both in favor of the greenback and against it. According to preliminary forecasts, Friday's report will reflect a further increase in inflation in the United States. The basic price index of personal consumption expenditures should rise to 4.8% (YoY) after a slight decline. If, contrary to fairly moderate forecasts, it reaches the psychologically important 5% mark, traders can organize another dollar rally.
And yet, despite the dominant bearish sentiment on the EUR/USD pair, it is quite risky to open short positions around the 96th figure. In my opinion, short positions on corrective pullbacks within the 0.9700-0.9850 (0.9900) price range look much more reliable. For example, if you roll back to the intermediate resistance level of 0.9780 (Tenkan-sen line) on the four-hour chart), you can consider shorts with 0.9700 as the target.
