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Abstract: The short-term trading structure shows that the EURUSD may have reached a short-term peak. However, the current downward pressure may be limited.

Fundamentals

In the autumn economic forecast of the European Commission, the GDP growth forecast in 2023 has been lowered to 0.6%, which is lower than the 0.8% forecast in early summer. The prospect of 2024 has also eased, and the GDP growth forecast has been lowered from the previous 1.3% to 1.2%. However, the growth rate is expected to rebound to 1.6% in 2025.

In terms of inflation, the annual forecast for 2023 will remain unchanged at 5.6%. However, the inflation rate in 2024 will be raised to 3.2%, which is higher than the 2.9% predicted in the summer. The European Commission predicts that the inflation rate will further slow down to 2.2% in 2025.

Valdis Dombrovskis, executive vice-president of the European Commission, expressed cautious optimism, saying: "After this year's very weak growth, we expect that growth will rebound moderately in 2024 with the help of a strong labor market and continued moderate inflation." He also emphasized the uncertain geopolitical background, especially the recent conflict in the Middle East and its potential impact.

Paolo Gentiloni, an economic Commissioner, also expressed the same view. He pointed out that "the strong price pressure and the monetary tightening needed to contain the price pressure, as well as the weak global demand, have brought losses to families and enterprises."

Looking ahead, Paolo Gentilon predicted that "with the further easing of inflation and the flexibility of the labor market, economic growth will pick up slightly." He also acknowledged that the direct impact of the Middle East conflict on the economy is limited, and warned of the intensification of geopolitical tensions and the uncertainties and risks they bring to the future economic structure.

According to the Reuters survey, most analysts insist that the European Central Bank (ECB) will keep interest rates stable until next year, even though the eurozone may fall into recession, and the first rate cut will wait until at least July.

Last month, after raising interest rates for 10 consecutive meetings, the ECB kept the deposit interest rate at an all-time high of 4.00%. All 72 economists surveyed believed that there would be no interest rate increase in the current cycle. Although the financial market currently expects the ECB to cut interest rates in April next year, the latest Reuters survey shows that it is unlikely, especially since Lagarde said last month that it is completely premature to discuss the interest rate cut.

In our view, it seems that nothing much needs to happen to push the eurozone into recession. The ECB has admitted that economic growth is weaker than expected. But this does not mean that the ECB is eager to cut interest rates. They do not expect any interest rate cuts before the summer of 2024.

On the market side, although the U.S. economic data shows that the domestic interest rate has peaked, the USD will continue to be supported by the spread better than that of the Group of Ten. The premium of the 10-year U.S. Treasury Securities yield relative to the average yield of the same period of the Group of Ten has narrowed, but the spread is still greater than the recent average. This indicates that the dominant position of the USD will continue in the near future. Although the discussion about the peak of interest rates in the U.S. continues to heat up, in Europe, the discussion is deeper, which will weaken the EUR. When the Bank of Japan "finally" withdraws from the negative interest rate policy, the USD will face a meaningful headwind, but this year seems unlikely. (bullish for the USD)

Technical Analysis

The EURUSD rose sharply yesterday after the release of the U.S. October inflation report, an intraday gain of 1.7%, the largest one-day gain in a year, hitting a two-and-a-half month high of 1.0886, but the current rise seems to be close to the end.

Momentum indicators show that the signal lost momentum after hitting the overbought zone; however, MACD and oscillators are still reinforcing their bullish trend, suggesting that the bulls still have some room to move higher. Moreover, the EURUSD is well above the 200-day SMA, which has been a strong resistance level in the past, after yesterday's strong gains, while the 20- and 50-day SMAs are showing strong resistance, with bullish crossovers currently in place.

At present, bulls are consolidating at high levels and are ready to test new highs again. If the EURUSD reactivates its upward trend above 1.0886 at the top of Tuesday, the next target will be the psychological barrier of 1.0900, followed by the resistance level of 1.0945. However, we also said that the path with the least risk after the rise is downward. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 1.0900

Target price: 1.0700

Stop loss: 1.1000

Deadline: 2023-11-29 23:55:00

Support: 1.0802, 1.0764, 1.0756, 1.0700

Resistance: 1.0887, 1.0945, 1.0959, 1.1000