Topics of conversation about the euro:
- This morning she brought Kastrychnitskaya ECB rate decision and press conference with The European Central Bank raised interest rates by 75 basis points.
- Christine Lagarde’s press conference brought bearish spending, and the lack of forward-looking guidance from the bank has traders guessing about the ECB’s next move. Lagarde did warn that more rate hikes are expected, but the size and scope are unknown. The ECB’s next policy meeting will be held on December 15.
- The analysis contained in the article is based on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education separation.
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EUR/USD was in the midst of its strongest week in four months ECB rate decision this morning. The bank was expected to raise rates by 75 basis points, which it did. They also announced a change to TLTROs, which are designed to encourage banks to lend. But with rates rising, the policy is essentially subsidizing the banking sector, and Lagarde announced today that the program will be modified to bring the rate in line with the current ECB deposit line rate. It will actually increase the cost of borrowing for European banks, so it’s essentially the removal of another stimulus tool.
The other big question mark that remains unanswered is what the ECB plans to do with the balance sheet. Currently, the ECB is on 8.8 trillion Euro portfolio, but Lagarde directed her attention to it until the bank’s next rate decision in December.
As for the tariff policy – there are no forward-looking recommendations, all we have are simple hints and statements from Lagarde this morning about new hikes. This could allow the ECB to be more nimble, and using comments between meetings similar to the Fed, the bank could essentially try to nudge rate expectations in any direction depending on economic conditions. But – and it’s a big but – if markets remain skeptical of the ECB’s execution, given the Fed’s very dovish outlook, this could be an area of vulnerability, especially given the importance of the EUR/USD spot quotation for the European economy.
i started to consider a deeper pullback in the EUR/USD bearish theme last weekand it was really helped by several things, the key of which was the US dollar.
The US dollar was built by double top, which is bearish, and this top was held by two rather thoughtful drivers, suggesting that there may be a countertrend at work there. This USD formation has already been filled and the price has already reached the projected target from the formation at 109.62.
But given how heavy the euro is in DXY (57.6%), it was unlikely that the USD would fall without at least some upside in EUR/USD, and that started to show on Friday.
I revisited this question on Monday of this week, and by then EUR/USD had already risen for a resistance test at a very key spot on the chart. The 0.9900 level is in line with the bearish trendline, and as I said, a break above is likely to trigger shorts, with more potential to do so at the psychological levels of 0.9950 and 1.000. This happened and the price ran all the way to my next resistance at 1.0095which helped set a high this morning just before the ECB.
During the ECB meeting, prices in the pair retreated and even dipped below the parity level until support appeared at Tuesday’s swing high near 0.9977. This has since led to a bounce and this keeps the door open for bullish continuation scenarios as we now have another higher high found so far support at previous resistancewhich can be higher or lower.
Two-hour EUR/USD chart
EUR/USD: Reversal or Pullback?
At this point, I’m still of the opinion that this is a short squeeze scenario. Given how aggressive the bearish trend has been since February, along with the recent pullback in energy prices with some fear dissipating around the situation in Europe heading into this winter, it was only logical that we would see some counter-trend action and given how long the move was that stops would be placed above them psychological levels which can lead to fast movement based on momentum as each level comes into play.
But that being said, there could be more room to run this thread. My next resistance point coincides with 23.6% Fibonacci retracement sales from May 2021 to September 2022, and it is 1.0198; and above that is a key level of long-term value at 1.0350, which was the low of 2017 and helped stop this summer’s sell-off from May to August. This would be a big decision point when he can enter the game.
And with the drivers in the headlines next week, we have to consider such a scenario as possible. Tomorrow brings Core PCE, the Fed’s preferred measure of inflation, and next Wednesday the long-awaited FOMC rate decision.
EUR/USD weekly price chart
If you listened to Lagarde’s comments during the press conference this morning, there wasn’t much positivity. It appears that the bank is raising rates because it needs to, and as she has repeatedly pointed out, there are serious headwinds in the European economy.
However, European stocks continue to rise, as they did after the US CPI print last month on October 13. I’ve drawn a red trend line on this move in the chart below, highlighting the rapid pace of this recovery, even if the data remains rather bleak.
As our own Tammy Da Costa pointed out yesterday, The DAX has even started to test some key long-term resistancestaken from the upper side of a falling wedge pattern.
Buyers forced a break through this pattern this morning, and the index is now trading at a new one-month high.
Two-hour DAX chart
DAX falling wedge
Emerging wedges are often tracked for bullish reversal potential. The logic is that sellers fret around lows or support while remaining aggressive at highs or near resistance, and this could be an early sign of bearish pressure slowing. After all, if the sellers were really aggressive, they should have made new lows after the support came into play, right? And if not, there’s probably a reason for that.
Looking atthis from the weekly chart, it appears that we are just now starting to test this, even with the intraday breakout above this level, and the index has already made a powerful move from the lows of just a few weeks ago, which are now showing just under 12% .
So the chase could be an issue here, but a continued push from the bulls could re-open the upside theme. It’s hard to justify an optimistic stance from a fundamental standpoint, but that’s been the case over the past month, and that hasn’t stopped buyers from continually pushing the envelope. Therefore, in such situations, it is better to track the price until there is evidence of a reversal.
DAX weekly chart
Short-term DAX levels
There is currently a large confluence area that could act as support, and resistance has already been at several different points. This is between the Fibonacci levels of 12,966 and 13,115. If the sellers can present a reversal through this level, we may soon have a bearish scenario again, but I would be cautious on this until we get confirmation.
For the next resistance levels, I am tracking the previous price action swings at 13,447 and 13,572. If these come into effect, we will have a more confirmed breakout of the long-term wedge, which will add to the bullish nature of this movement that we have seen over the past few weeks.
DAX daily chart
I prepared the diagram James Stanley; DAX Futures on Tradingview
— Written by James Stanley, DailyFX.com Senior Strategist and Managing Director DailyFX Education
Connect with James and follow him on Twitter: @JStanleyFX