The EUR/USD pair continues to trade within the 1.06 handle, slowly sliding towards the barrier of 1.0600. After a 400-point downward move, EUR/USD sellers are forced to take a pause while awaiting the next piece of information to drive the market. Traders need a strong enough information impetus that will not only help them break through the support level at 1.0600 (the lower Bollinger Bands line on the daily chart) but also establish themselves within the 1.05 handle. A slew of key economic data is set to roll out on Friday, September 29. We can look forward to the core PCE index and the Eurozone Consumer Price Index. These reports have the potential to trigger significant turbulence in the EUR/USD pair, and under certain conditions (accelerating inflation in the US and simultaneous deceleration of the CPI in the eurozone), they could pave the way towards the 1.05 handle. However, Friday is still far away, and the economic calendar for the current week is quite busy. Therefore, EUR/USD traders are forced to, on one hand, react to the current news flow and, on the other hand, exercise caution ahead of key reports.
At the start of Monday's European session, EUR/USD sellers tried to break through the support level at 1.0600, but the IFO indices prevented them from launching a full-blown attack. The report turned out to be in the "green zone," and this provided the euro with a small, rather symbolic, boost. The ifo Business Climate Index fell to 85.7 points in September, down from 85.8 points (seasonally adjusted) in August, while most experts had forecasted a decline to 85.2 points. This indicator has been declining for the fifth consecutive month. The Current Assessment Index recorded a fall from 89.0 to 88.7, still surpassing the forecasted 88.0. This gauge has been declining for the sixth consecutive month.
In other words, the indices de facto demonstrated a downtrend, but the "depth of the fall" was less than the more pessimistic forecasts of experts.
To put it plainly, considering the current fundamental backdrop, the "green tint" of the IFO is just like putting superficial changes. The European Central Bank voiced its verdict last week, declaring a wait-and-see stance, and this became the main driver of the euro's decline. IFO, PMI, ZEW indices play a secondary, supporting role, exerting limited influence on EUR/USD.
For instance, last Friday, PMIs were published in many eurozone countries. German indicators were also in the "green zone," but below the key 50-point mark. In particular, the Manufacturing PMI came in at 39.8 points, with a forecast of "growth" to 39.5. The Services PMI rose to 49.8 points (the previous value was 47.2). However, the Eurozone Manufacturing PMI declined to 43.4 in September, missing estimates of 44.0. The Eurozone Services PMI also fell short of the key 50-point target.
EUR/USD buyers are clearly making a desperate attempt at saving themselves, attempting corrective pullbacks whenever possible. However, these attempts are failing one after another because the "ECB verdict" is pulling the pair down like a heavy anchor. The recent comments from ECB officials only add weight to this burden.
On Monday, two ECB representatives, Pablo Hernandez de Cos and Villeroy de Galhau, said that the central bank should not further raise interest rates. In their opinion, the target level of inflation can be achieved through a different method, namely by keeping interest rates at their current level "for a sufficiently long time." As De Cos noted, such a strategy, on the one hand, will avoid "insufficient tightening," and on the other hand, will prevent excessive tightening, which would negatively impact economic activity and employment.
In essence, this is the key message of the ECB's September meeting: by raising interest rates "for the time being," the central bank has announced that it will keep them at the current level "for a sufficiently long time." In this context, the eurozone inflation report, which will be published this Friday, will have an important but not decisive role (according to forecasts, both the general and core CPI slowed down in August). Meanwhile, the core PCE index, which will be released in the US on the same day, could significantly strengthen the greenback if it remains in the "green zone" (a decrease to 3.9% YoY is expected). In that case, the likelihood of a Fed rate hike in November will increase. The rise in hawkish expectations will provide additional support to the dollar.
Therefore, the current fundamental backdrop supports the continuation of the bearish trend in the EUR/USD pair. At the moment, the pair is near the support level of 1.0600 (the lower Bollinger Bands line on the daily chart). Therefore, it is advisable to open short positions after sellers break through this price barrier and consolidate in the 1.05 figure area. In this case, the next target for the downtrend will be the 1.0550 level, which is the upper band of the Kumo cloud, coinciding with the lower Bollinger Bands line on the weekly chart.
