EUR/USD is following through to the upside on the heels of Monday’s gain, with the pair currently trading at 1.1018, up 0.19%. With today’s follow through, the pair is now up about half a percentage point over Friday’s close. Weakness in the dollar is helping boost EUR/USD, as the basket of currencies is pulling back after recently establishing a seven-month high.
The advance in EUR/USD is helping ease an extreme oversold condition that developed on both a daily and weekly basis as a result of the steep losses that have been posted in the month of October. The rally appears largely in response to the oversold condition, as Monday’s release of September Eurozone CPI was in line with expectations. According to Eurostat, the Consumer Price Index for the month of September increased 0.4%, up from a 0.2% rise in August. On an annualized basis CPI was 0.4%, unchanged from August. With the Stochastic, a price momentum indicator still at a relatively depressed level on a daily basis, the rebound has the potential to extend over the short term.
However, volatility has the potential to become a factor later today, as the U.S. is set to release September CPI data at 8:30am EST. Consensus estimate for Sept. CPI is 0.3%, while the Core CPI consensus forecast is at 0.2%. This will be a key metric in the Federal Reserve’s decision to raise rates before the end of the year, a factor that will have bearing on the dollar. As of Monday’s close, Fed Fund futures were indicating a 69.5% chance of a rate increase at the December meeting.
The key event this week for EUR/USD, however, is Thursday’s European Central Bank Governing Council Meeting. Bank President Draghi will hold his regular press conference 45 minutes after the interest rate decision, which is due out at 7:45am EST. This is a particularly important meeting for the ECB, as there is only one additional meeting prior to the end of 2016. While rates are expected to remain unchanged, there will be an important focus on the bond-purchase program, which is currently due to come to an end in March 2017. Positive comments could help establish a short term bottom in the pair.
At present, however, given the recent breakdown in EUR/USD, which resulted in a solid downside break from a symmetrical triangle on the weekly chart, the intermediate term bias in EUR/USD is to the downside. Thus, it appears that short term rally attempts are best used as selling opportunities in anticipation of further losses in the weeks ahead.
On the upside, the middle of Friday’s tall red candle near 1.1012 has been surpassed in today’s trading, leaving the next level to watch at 1.10584, a corrective top established on the 4-hour chart. This top represents a test of the former support defined by the August 5th reaction low. Given the strong downward trend in EUR/USD at the present time, a mere reaction to an oversold condition should not be enough to lift the pair above this significant area of overhead resistance, at least on a sustained basis.
On the downside, key support is at the recent lows, which represent a test of the July reaction low at 1.0952. On a drop below this level, the target becomes the spike low established following the June Brexit referendum at 1.09119, followed by the late February/early March reaction lows at 1.08222.