EURUSD Rate Searches for Support as ECB Calls for Fiscal Stimulus

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EUR/USD Rate Talking Points

The minor rebound in EURUSD proved to be short-lived, with the exchange rate slipping to a fresh yearly-low (1.0885) going into October, and the Euro may continue to exhibit a bearish behavior amid the weakening outlook for the monetary union.

EURUSD Rate Searches for Support as ECB Calls for Fiscal Stimulus

EURUSD extends the series of lower highs and lows from the previous week as updates to Germany’s Consumer Price Index (CPI) shows the headline reading slipping to 1.2% from 1.4% per annum in August.

The development may put increased pressure on the European Central Bank (ECB) to further insulate the Euro area as the Governing Council struggles to achieve its one and only mandate for price stability. However, recent comments from ECB officials suggest the central bank is running out of tools as board member Philip Lane insists that “the positive impact of government spending is particularly strong in an environment of low interest rates.

The remarks coincide with the fresh comments from Bank of Italy Governor Ignazio Visco, and it seems as though the Governing Council will revert to a wait-and-see approach ahead of President Mario Draghi’s departure at the end of October as the central bank prepares to reestablish its asset-purchase program in November.

In turn, the ECB may move to the sidelines at its next meeting on October 25, but the Governing Council may continue to endorse a dovish forward guidance as officials reiterate that the central bank “continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

With that said, EUR/USD may continue to exhibit a bearish behavior over the remainder of the year especially as the Federal Reserve takes a more patient approach in managing monetary policy.

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EUR/USD Rate Daily Chart

Source: Trading View

  • Keep in mind, the broader outlook for EURUSD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0885) in September.
  • Nevertheless, recent developments in the Relative Strength Index (RSI) foreshadow a further decline in the exchange rate as the oscillator snaps the bullish formation from earlier this month.
  • In turn, the failed attempt close above the 1.1100 (78.6% expansion) handle brings the downside targets back on the radar, with the lack of momentum to hold above the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement) raising the risk for a move towards the 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement) area.

For more in-depth analysis, check out the 4Q 2019 Forecast for Euro

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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