Chapter 61 10/31 EURUSD: Go Short at the Highs as the Medium-term Downtrend Has Not Changed
Abstract: In the third quarter, the GDP of the eurozone contracted by -0.1% month-on-month, and the EU increased by 0.1% month-on-month. The European Central Bank (ECB) Governing Council denied the expectation of interest rate cuts and urged patience with policy decisions.
Fundamentals
In the third quarter, the GDP of the eurozone unexpectedly contracted by -0.1% month-on-month, exceeding the expectation of 0.0% stagnant growth. Compared with the same period last year, the eurozone economy barely showed positive growth, with a year-on-year increase of 0.1%. At the same time, a similar pattern has been reported in the wider EU, with an increase of 0.1% both month-on-month and year-on-year.
The performance of member countries varies greatly. Latvia was the best performer, with an increase of 0.6% compared with the previous quarter, followed by Belgium and Spain with an increase of 0.5% and 0.3% respectively. On the contrary, Ireland experienced the largest decline, with a contraction of -1.8%, followed by Austria with a contraction of -0.6% and the Czech Republic with a contraction of -0.3%.
The year-on-year growth rate also shows similar differences among member countries. Portugal, Spain, and Belgium took the lead, increasing by 1.9%, 1.8% and 1.5% respectively. However, Ireland experienced a sharp decline of -4.7%, and Estonia (-2.5%), Austria and Sweden (both -1.2%) are also facing sharp contraction.
These data are unlikely to change the market's view that the ECB has raised interest rates, but they can play a role in determining when traders expect the ECB to cut interest rates for the first time. Overnight index swap shows that the first interest rate cut is expected to be in April 2024, and this possibility has increased since the September meeting, but the ECB Governing Council Kazimir said that this bet is wrong and it is too early to talk about interest rate cuts.
Gediminas Simkus, a member of the ECB's Governing Council, echoed this view. "In my view, the current level of restrictions would be sufficient to steer inflation back to the target level in the absence of new alarming data", he said.
When it comes to speculation about possible interest rate cuts, Simkus's position is clear. "Inflation is still high, and any discussion about cuts is premature. We need strategic patience to keep interest rates at a restrictive level. "
He added, "I would be very surprised if I saw the interest rate cut in the first half of 2024. I don't think so. "
However, if inflation continues to slow down faster than expected, or economic growth is weak, his remarks are likely to be ignored, and the money market may increase the interest rate cut bet.
Technical Analysis
The EURUSD is moving higher, accelerating within an uptrend channel after breaking above its short-term SMA after members of the ECB's Governing Council denied expectations of a rate cut.
Although we are not bullish on further price gains for the EURUSD, momentum indicators are showing that stochastic is really moving higher, while MACD has just broken above the 0-axis. Both have a positive relationship with their upward channels, although the former is entering the overbought zone.
If the EURUSD continues to rise, the previous high of 1.0694 and the key psychological barrier of 1.0700 will prevent it from rising further. If both hurdles are lost, then 1.0736 will be the last line of defense for the bears, and breaking through it will end the medium-term downtrend.
However, if the rebound falters and the bulls fail to further test the previous high of 1.0694 and the key psychological level of 1.0700, then the market may return to the early October starting point of 1.0473 level.
Overall, the short-term outlook looks relatively positive, although a break above the October high of 1.0694 would put the EURUSD on a good uptrend. However, for the medium-term outlook to turn bullish, gains would need to extend further, at least to the 38.2% Fibonacci retracement at 1.0763; otherwise, the medium-term downtrend is unchanged. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 1.0684
Target price: 1.0473
Stop loss: 1.0778
Deadline: 2023-11-14 23:55:00
Support: 1.0638, 1.0617, 1.0594, 1.0522
Resistance: 1.0694, 1.0700, 1.0736, 1.0767
