Weak Euro Buoyed by Dollar Selloff, Lower Yields

EUR/USD, EUR/GBP News and Analysis

Euro Fundamentals Slide Lower after IMF Issues Growth Downgrade

The IMF released its semi-annual World Economic Outlook (WEO) this week where a number of growth downgrades were issued. Germany was among the worst performers seeing 2023 and 2024 GDP decline 0.2 and 0.4 percent from the July estimates.

The German GDP downgrade comes as no surprise as Europe’s largest economy may have already endured another quarterly contraction in Q3, potentially a third contraction out of the last 4 quarters.

The data did little to arrest the recent relief rally in EUR/USD, although, the majority of the driving force will be attributed to the US dollar selloff and US Treasury dynamics.

IMF World Economic Outlook (October Edition)

Source: IMF World Economic Outlook, prepared by Richard Snow

With central banks nearing the end of their respective tightening cycles, what lies in store for the Euro in Q4? Read our Euro forecast below:

EUR/USD tests 38.2% Fibonacci level after breaking above trendline resistance

EUR/USD has strung together five straight trading sessions of gains as the dollar selloff continues. The first indication came via an upside breakout with price action now testing the 38.2% Fibonacci retracement of the major 2021 to 2022 move.

The longevity of the EUR/USD move has come under great scrutiny recently as the euro has not fared well against most G7 currencies. Therefore, the relief rally appears devoid of bullish drivers from the euro and is dominated by a softer US dollar.

The ECB is due to meet at the end of this month with market expectations seeing no further rate hikes and pricing in a first rate cut in June/July next year. 1.0700 appears as the next major level needing to be conquered to entertain an extension of the move and possible reversal. However, the dollar may soon swing back into favour with its safe haven appeal amid the ongoing conflict in the Middle East.

US CPI will be the next determinant of price direction as a downside surprise in headline and/or core inflation could extend the EUR/USD rally. Hotter inflation could breathe lift back into the dollar and pose a challenge to further EUR/USD upside.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The weekly chart reveals the extent of the longer-term downtrend, which remains well intact. 10640 is the level to watch as a clue for upside continuation.

EUR/USD Weekly Chart

Source: TradingView, prepared by Richard Snow

EUR/GBP slide extends ahead of UK GDP data tomorrow

EUR/GBP continues slide after the MACD indicator signaled a momentum shift. After breaking above the long-term range, EUR/GBP failed to capitalize on the feat seeing the pair trade back within the prior range. The recent bearish directional move has breached beneath 0.8635- a prior level of resistance that halted prior advances.

Notable upper wicks have been witnessed during the bearish directional move – suggesting a rejection of higher prices. 0.8565 is the next key level of support with resistance at 0.8660.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

Major Risk Events Ahead this Week

Today, the final reading on German inflation met expectations of 4.5% year-on-year and later the FOMC minutes will be released, although, a lot of what had been discussed will seem like old news as the ‘higher for longer’ narrative has shifted in recent days towards a more dovish approach from Fed officials given the recent surge in bond yields. Higher yielding longer-term bonds influence mortgage rates – which now stand at 8%, constricting household spending. Then UK GDP data comes due followed by ECB minutes and US inflation data for September.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX