Vulnerable to further losses under moderate inflation

EUR / USD, European Central Bank, Eurozone inflation, Covid-19 – Talking points:

  • Stock markets drifted lower during Asian trading as the lack of progress in US budget negotiations continued to eat away at market sentiment.
  • Upcoming inflation data could dictate the short-term outlook for growth-sensitive countries euro.
  • EUR / USD ready to extend its decline after failing to break through key resistance.

Asia-Pacific recap

Stock markets fell during Asia-Pacific trading session, with Australia ASX 200 index down 0.54% and that of Japan Nikkei 225 sliding index of 1.4%.

The associated paradise US dollar and Japanese Yen continued to push higher relative to their major counterparts, as the prolonged stalemate in US fiscal stimulus talks appeared to sour market sentiment.

Gold slipped lower and silver slipped more than 0.5% as 10-year US Treasury yields edged down.

Looking ahead, U.S. retail sales and industrial production figures for September top the economic rankings alongside inflation data outside the eurozone.

EUR / USD Outlook: Vulnerable to further losses in the event of moderate inflation

Upcoming inflation data could influence the ECB

The growth-sensitive euro has come under fire in recent days, as several European countries attempt to tighten restrictive measures amid a record increase in coronavirus infections.

These sales could intensify in the coming days if upcoming inflation data in the euro area continues to show slow growth in consumer prices, with headline inflation expected to fall to -0.3% and the core inflation rate at a record high of 0.2%.

Of course, part of the recent weakness in consumer prices can be attributed to the late summer sales and the sharp depreciation in energy prices.

Nonetheless, a noticeable stagnation in inflation may fuel bets that the European Central Bank will ease its monetary policy parameters further.

In fact, several members of the Governing Council have pleaded “for the maintenance of a”hand free “ given the high uncertainty, which underlies the need to carefully assess all incoming information, including the euro exchange rate, and maintain the flexibility to take appropriate policy action if and when this is necessary ”.

Therefore, disappointing impressions of headline and core inflation may intensify the need for further support from the ECB and in turn lead to a sharp reduction in the euro against its major counterparts.

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EUR / USD Daily Chart – Head and Shoulders in Mind

Outlook EUR / USD: vulnerable to further losses in moderate inflation

EUR /USD daily chart created using TradingView

From a technical standpoint, the EUR / USD exchange rate looks poised to extend its retreat from monthly high (1.1831) after failing to hold above the 50-day moving average which defines the trend (1.1727).

The pullback in the RSI below its neutral midpoint, in tandem with the MACD indicator following firmly in negative territory, hints at bearish momentum and could ultimately inspire a more extensive downward push, if the psychological support is found. to 1-17.

With that in mind, a daily close below August’s low (1.1696) would likely signal a continuation of the downtrend from the annual high (1.2011) and set a path to test the March high ( 1.1495), if sellers can overcome 38.2% Fibonacci support (1.1626).

Conversely, a breakout and close above the 21-DMA (1.1752) could inspire a rebound to the October 9 high (1.1831), with a daily close above the 1.1850 needed to focus on annual high (1.12011).

4-hour EUR / USD chart – Rise in breakout of the coin portends further losses

Outlook EUR / USD: vulnerable to further losses in case of moderate inflation

4 hour EUR / USD chart created using TradingView

Zooming in on a 4 hour chart reinforces the bearish outlook depicted on the daily period as price develops a bearish flag pattern above key support at August low (1.1696).

However, the development of the MACD suggests bullish momentum as it looks at a cross above its slower signal line counterpart.

That being said, an impulsive downward push appears on the cards, with a break below 1.17 likely validating the further bearish pattern and making its way to test September’s low (1.1612).

On the other hand, if psychological support at the 1.17 mark remains intact, a rebound towards the 200-MA (1.1756) which defines sentiment.

IG EUR / USD customer sentiment

Outlook EUR / USD: vulnerable to further losses in case of moderate inflation

Data from retail traders shows that 41.56% of traders are net long with a short / long ratio of 1.41 to 1. The number of net-long traders is 8.50% higher than yesterday and 16.73% higher than last week, while the number of net-short traders is 9.45% lower than yesterday and 13 .00% lower than last week.

We generally take a vexing view of crowd sentiment, and the fact that traders are net-short suggests that EUR / USD prices may continue to rise.

However, traders are less net-short than yesterday and compared to last week. Recent sentiment shifts warn that the current EUR / USD price trend may soon reverse lower despite traders remaining net-short.

– Written by Daniel Moss, Analyst for DailyFX

Follow me on twitter @DanielGMoss

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