EUR/USD Price Analysis – Oct 20, 2023

Daily Price Outlook

During the European session on Friday, the EUR/USD currency pair continued its bearish trend, shedding further ground and trading around 1.0575. It retreated from its one-week high of approximately 1.0615, which it had reached the day before. This decline can be attributed to the increased demand for the US Dollar (USD), as buyers flocked to it, putting pressure on the Euro.

However, the downward trend in EUR/USD can be attributed to several key factors, primarily the possibility of an additional interest rate hike by the U.S. Federal Reserve in 2023, coupled with the relatively high yields on U.S. bonds. These elements are bolstering the appeal of the US Dollar (USD). Furthermore, escalating geopolitical tensions are reinforcing the Greenback's status as a safer choice for investors, thereby exerting pressure on the Euro.

Powell's Inflation Stance and High Bond Yields Bolstering USD

It's worth noting that Federal Reserve (Fed) Chair Jerome Powell stated on Thursday that inflation still remains too high. He also emphasized that monetary policy hasn't become excessively restrictive yet. This reaffirms our expectations of another interest rate hike by the end of this year. Consequently, the yield on the 10-year US government bond remains elevated, nearing a 16-year peak and approaching the significant 5% threshold. This robust yield continues to bolster the US Dollar (USD). Furthermore, there is cautious mood in the market, favoring the safe-haven US Dollar and putting pressure on the EUR/USD pair.

Geopolitical Concerns and Safe-Haven USD Amid Israel-Hamas Conflict

Moreover, the ongoing concerns about the Israel-Hamas conflict potentially spreading across the broader Middle East are making the entire market nervous. Meanwhile, the recent reports of a Gaza hospital tragedy with hundreds of Palestinian casualties have intensified these worries.

On top of that, there is increasing concern about economic challenges caused by rapidly rising borrowing costs. All of this is making investors less willing to take risks, which is noticeable in the generally weaker mood in the stock markets. As a result, more people are shifting their investments towards traditional safe-haven assets, including the US Dollar.

ECB's Rate Hike Pause and Stagflation Concerns Impacting EUR/USD

Furthermore, financial markets are factoring in the possibility that the European Central Bank (ECB) may refrain from further interest rate hikes. This caution arises from concerns about the potential for a more pronounced economic downturn and the looming risk of stagflation, a scenario in which the economy remains stagnant while inflation remains high. The ECB hinted in September that their recent interest rate increase, marking the 10th hike in 14 months to combat inflation, could be the final one.

Moreover, ECB policymakers appeared cautiously optimistic last week, expressing the belief that inflation would gradually return to the 2% target without necessitating further rate hikes. This outlook suggests that the EUR/USD pair is more inclined to continue its downward trend.

EUR/USD - Technical Analysis

The EUR/USD currency pair, an instrumental barometer in the foreign exchange market, starts the trading session at 1.05748, witnessing an almost imperceptible decline of -0.04%. Its intrinsic price dynamics are underscored by a pivot point established at $1.0561. Those bullish on the currency pair should monitor the immediate resistance level at $1.0601, followed by $1.0638 and capped at $1.0672. Conversely, potential downside pressures could encounter supports placed at $1.0524, further down at $1.0491, and culminating at the $1.0450 mark.

Delving into the realm of technical indicators, the Relative Strength Index (RSI) is hovering at 54. Typically, any value above 50 leans towards a bullish sentiment, while a figure below this level hints at bearish undertones. The current reading suggests that traders are slightly leaning towards optimism in the near term. On the momentum front, the Moving Average Convergence Divergence (MACD) line stands slightly below its signal counterpart. This configuration intimates a potential bearish trend on the immediate horizon, urging caution. To further season our analysis, the 50-Day Exponential Moving Average (50 EMA) is poised exactly at $1.0561. With the EUR/USD trading marginally above this figure, it is emblematic of a tepid bullish inclination.

Chart patterns, often the cartographers of market trajectories, are currently inconclusive, pending the emergence of any distinct formations.

In summation, the EUR/USD shows a potential bullish disposition if it remains buoyed above the $1.05617 level. Conversely, breaking below could steer the currency pair into bearish territories. In the short run, our projection is to witness the EUR/USD flirt with the immediate resistance level of $1.0601. Any breach of this threshold might usher in further appreciations.

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