Chapter 31 10/16 EURUSD: Mid-Term Oversold Structure May Ease the Downward Pace, but Recovery Remains Faltering
Summary: The EURUSD started the week with a mild rally. The asset is battling bearish momentum in the short and medium term, which makes it difficult to extend the current rally higher. However, from a medium-term perspective, the asset appears to be oversold, which could limit current losses. Nonetheless, achieving significant gains at this moment is proving difficult.
Fundamentals
European Central Bank (ECB) President Lagarde emphasized during her speech at the International Monetary Fund annual meeting that economic activity in the Eurozone weakened in the third quarter, attributed to the economic slowdown, with future risks tilted towards the downside. Lagarde expected inflation to continue declining but acknowledged that there were risks on both sides of this path. She also reiterated that the current interest rates would bring inflation back to target levels and be maintained for a "sufficiently long duration".
She noted, "Incoming data suggest that activity has been weak in the third quarter," attributing this to "slower global demand and the impact of tighter financing conditions."
Lagarde pointed out that "risks to the outlook continue to be tilted to the downside," while also acknowledging that factors such as a "strong labour market, rising real incomes, and receding uncertainty" might boost economic growth.
Regarding inflation, Lagarde expected a downturn in the Eurozone due to "easing cost pressures" and the effects of monetary policy tightening. However, she mentioned, "The downward path has risks in both directions." While upside risks might stem from factors like "renewed upward energy and food cost pressures," potential downside risks could arise from "weaker demand" or a deterioration in the international economic environment.
Lagarde also reiterated the ECB's stance on interest rates: "We consider that our key interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target."
In terms of the market, a recent economist survey indicates that the ECB is unlikely to lower interest rates before September 2024, suggesting that the message of no imminent rate cuts from policymakers has taken hold. This outcome aligns with recent statements from ECB officials during the International Monetary Fund annual meeting in the past few days. Furthermore, the market currently anticipates a slowdown in Eurozone inflation to 2.7% in 2024 and further down to 2.1% in 2025. However, economic growth is expected to be lower than previously anticipated, with Eurozone economic growth forecasted at 0.5% in 2023, only rising to 0.7% next year.
Technical Analysis
The EURUSD has been steadily retracing after reaching its peak at 1.1276, an 18-month high, forming a series of lower highs and lower lows. Despite attempting to stabilize around the 10-month low of 1.0448, the recovery pace has been hesitant after touching a descending trendline connecting recent lower highs.
The structure in the 4-hour chart reveals that the asset not only broke below the 1.0565 support area but also breached a critical bullish trendline.
Bearish forces have also tested the 1.0500 support area, along with the 76.4% Fibonacci retracement from the recent low at 1.0448 to the high at 1.0639.
If the bearish momentum continues, the asset could dip below 1.0448. The next key support lies around 1.0445, and a breach below this level could test 1.0420. Any further losses could potentially drive the asset down to the 1.0350 level.
On the positive side, if the asset reverses higher after testing 1.0480, the initial uptrend may target the recent supply zone at 1.0628. Overcoming this hurdle, the bulls may aim for the next resistance area around the 1.0696 range. A close above that level could signal a gradual uptrend. In such a scenario, the asset could rise and recover towards the 1.0720 resistance zone.
Overall, the asset is still constrained by a medium-term bearish pattern, and further upside may require more confirmation of a bottom. Only if the bottom remains unbroken can the hopes of a strong recovery for the bulls be revived. In terms of trading strategy, buying the dips is recommended.
Trading Recommendations
Trading Direction: Long
Entry Price: 1.0480
Target Price: 1.0696
Stop Loss: 1.0390
Valid Until: 2023-10-30 23:55:00
Support: 1.0495, 1.0471, 1.0448
Resistance: 1.0557, 1.0626, 1.0673
