Euro Forecast: EUR/USD Bears Continue into Expected ECB Rate Cut

Euro, EUR/USD Talking Points:

• EUR/USD bears have continued to push with another fresh two-month low printing this morning.
• EUR/USD has pushed down to the 200-day moving average for a support test and the European Central bank is widely expected to cut rates tomorrow. The big question is how dovish they’ll sound for the remainder of the year which could show divergence between the US and Europe.
• EUR/USD is currently working on its sixth consecutive red day and that would be 13 of the past 14 days in the red following the failure at 1.1200 a few weeks ago. While the trend is clear, the concern is chasing an oversold market.

Sellers have made a statement so far in Q4 and the trend has been fairly clear for a while now. But it was just a few weeks ago that bears were continually stifled at the 1.1200 level, and this is where the early stages of deduction began to show the possibility of change.

At this point, EUR/USD is working on its sixth consecutive red day, which would make for 13 of the past 14 daily bars as red in the pair. This stands in stark contrast to the bullish trend that showed in Q3, with the majority of that strength focused in the first two months of the quarter while stall began to show in September.

The challenge now is just how hard bears have pushed, putting the pair in a precarious spot for chasing. There has been attempts at a bounce, such as what we saw early last week from the 1.0960 Fibonacci level, which led to a push towards 1.1000. But that instance saw the mirror image develop from what had shown in September, when buyers defended the big figure with a swing low just two pips above and that was a day ahead of the ECB meeting. Last week – sellers came in 2.7 pips below the 1.1000 handle and pushed continuation in the trend.

At this point, EUR/USD has now set a fresh two-month low while testing the 200-day moving average for the first time since early-August. There’s also a push into oversold territory on daily RSI. Neither of these factors denote imminent reversals – but it does caution towards chasing, even if the ECB is widely-expected to cut tomorrow.

EUR/USD Daily Price Chart

The Challenge of Chasing

There’s a difference between trading and analysis. Sure, analysis can help to line up trades but in trading, excursion is an important variable as risk management is front-and-center. There’s also the importance of psychology, which can bring on regret if driven by poor decision making dominated by the fear of missing out. This also speaks to trading strategy, which can be challenged by moves such as we’ve had in EUR/USD over the past week where sellers have just continued to push, albeit with less force at tests of lows than what’s shown at highs.

So, traders’ option sets haven’t been great on the pair over the past few days. This doesn’t necessarily mean that reversal scenarios become attractive because as I shared in the webinar yesterday, there could be better arguments to work with USD pullbacks in other major pairs. But in EUR/USD, this could be enough to promote the power of patience for fear of selling a low.

At this stage there are a couple of shorter-term factors that also point to pullback potential: There’s been a continued hold above the falling wedge that build last week and there’s been a continued case of RSI divergence on the four-hour chart.

For traders that do want to push continuation, they would need to have risk management protocol for breakout strategies with the expectation that selling a low would be a distinct possibility.

EUR/USD Four-Hour Price Chart

ECB Coming Up

The European Central Bank is widely-expected to cut rates again at tomorrow’s meeting. When they cut rates last month, markets were unsure that we’d get another and that’s what helped to drive the rate cut rally in the pair, as focus then shifted to the Fed for their expected rate cut a week later.

But the big question now with tomorrow’s cut seemingly priced-in, is whether Lagarde will echo a familiar tone or whether she’ll sound dovish to point to more cuts on the horizon. If she does continue to remain non-committal towards additional cuts, which could make sense given that Eurozone Core CPI is expected to print at 2.7% tomorrow which would illustrate a similar stall as what’s shown in US Core CPI, then there could be a case for a ‘sell the rumor, buy the news’ dynamic, which could point to pullback potential.

It's at the tests of lower-highs that we can begin to gauge trend potential, such as we saw last week with sellers defending the 1.1000 handle in the mirror image of what happened ahead of last month’s ECB meeting, when buyers defended 1.1000 before the rate cut rally pushed price right back to the 1.1200 handle.

EUR/USD Daily Price Chart

--- written by James Stanley, Senior Strategist