Euro Talking Points
Fundamental Forecast for Euro: Neutral
EUR/USD struggles to preserve the rebound from the monthly low (1.0989) as the United States Trade Representative is in the process of completing its investigation of France’s Digital Services Tax (DST), and budding fears of a trade war may drag on the Euro amid the weakening outlook for the monetary union.
In response, the ECB may keep the door open to further support the Euro area as the Governing Council stands “ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner.”
However, updates to the Euro Zone Consumer Price Index (CPI) may encourage the ECB to retain the current policy at its last meeting for 2019 as the headline reading is expected to widen to 0.9% from 0.7% in October. At the same time, the core rate of inflation anticipated to show a similar dynamic as the gauge is projected to increase to 1.2% from 1.1% during the same period.
In turn, the ECB may largely endorse a wait-and-see approach on December 12 as the central bank insists that “more information would be needed to reassess the inflation outlook and the impact of the monetary policy measures.”
Moreover, the account of the October meeting emphasized that “it was important to fully implement the September monetary policy decisions,” and the comments suggest the Governing Council will stick to the sidelines for the foreseeable future the central bank reiterates that “governments with fiscal space should act in an effective and timely manner.”
As a result, ECB President Christine Lagarde may call upon European lawmakers to provide fiscal stimulus as the central bank head is scheduled to testify in front of the European parliament on December 2.
With that said, an uptick in the Euro Zone CPI along with a batch of less dovish comments may generate a bullish reaction in EUR/USD, but the diverging paths with the Federal Reserve fosters a bearish outlook for the exchange rate as Chairman Jerome Powell and Co. moves away from its rate easing cycle, while the ECB reestablishes its asset purchase program.
EUR/USD Daily Chart
Source: Trading View
Keep in mind, the broader outlook for EUR/USD 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 (1.0879) in October.
The recent correction in EUR/USD appears to have run its course as the advance from the yearly-low (1.0879) fails to produce a test of the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement).
At the same time, the monthly opening range fosters a bearish outlook for EUR/USD amid the lack of momentum to test the October-high (1.1180).
The failed attempt to push back above the 1.1100 (78.6% expansion) handle may spur a move towards the overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement), with the next area of interest coming in around 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement).
Will keep a close eye on the Relative Strength Index (RSI) as it snaps the upward trend from September and tracks the bearish formation carried over from the previous month.
Additional Trading Resources
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.