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19 Oct 2022

EUR/USD drops below 0.9800, trimming its weekly gains

  • EUR/USD tumbled to the 20-day Exponential Moving Average (EMA), which could pave the way for further losses.
  • Eurozone inflation rising, the economy weakening, and the ECB hiking rates paint a gloomy scenario for the bloc.
  • EUR/USD Price Forecast: Failure to crack 0.9900 exposed the major to selling pressure.

EUR/USD snaps two days of gains, tumbles below 0.9800, after Eurozone (EU) inflation remained elevated, while the US housing market continues to feel the “pain” of higher interest rates, which would continue to increase, as reiterated by Fed speakers. At the time of writing, the EUR/USD is trading at 0.9770, down by 0.88%, after reaching a daily high of 0.9872.

The Euro tumbles on high EU inflation as stagflation looms

September’s inflation in the Euro area jumped by 1.2% MoM and 9.9% YoY, increasing the likelihood of a third straight 75 bps interest-rate hike by the European Central Bank (ECB). A slew of policymakers had justified the case of a ¾ percent lift to the bank rate, even though during the last week, the International Monetary Fund (IMF) foresaw a recession in Germany and Italy in 2023.

Given the backdrop of mixed sentiment in the Euro area, as shown by October’s ZEW survey, hinting at a recession, the EUR/USD appreciated. Factors like overall US Dollar weakness, and a stable UK bond market, sparked a relief rally on risk-perceived assets.

Aside from this, US economic data, namely the US Housing Starts for September, shrank by 8,1% MoM, due to the US Federal Reserve’s aggressive monetary policy tightening, with rates about to hit the 4% threshold, as speculations of another big-size rate hike mounted.

Hawkish Fed rhetoric continues

Aside from this, Minnesota Fed President Neil Kashkari said that inflation is too high while saying that the Federal funds rate (FFR) needs to get to the 4.5-4.75% to tackle inflation. He added that the Fed would need to continue its restrictive policy if inflation remains high.

EUR/USD Price Forecast

The EUR/USD refrained from testing the top-trendline of a descending channel drawn from February 2022, around the 0.9900 figure, exposing the Euro to selling pressure. Factors like fundamentals and the Relative Strength Index (RSI) crossing to bearish territory and about to pierce its 7-day RSI’s SMA would pave the way for further losses. Therefore, key resistance levels would be tested, like the October 13 swing low of 0.9631, followed by the YTD low at 0.9536.

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