On Thursday, the EUR/USD pair sustained its decline and settled below the moving average line. The euro fell for the second consecutive day without any compelling reasons or grounds. Recall that the situation was exactly the opposite in recent months and even the past year. Typically, the euro would rise without apparent reasons or grounds. We have already discussed this issue. Since the beginning of the year, we have pointed out to traders that the euro's rise is often illogical. The market has been anticipating a Federal Reserve rate cut from the start of the year, and this expectation has been factored into the dollar's exchange rate. However, upon closer examination, we have concluded that the market has been pricing in a Fed rate cut for two years. In the summer of 2022, US inflation began to slow down, and a month later, the prolonged decline of the US dollar began.
If the market follows any logic, then with the start of the US monetary policy easing cycle, the dollar will also rise for a long time. Moreover, the European Central Bank, whose monetary policy was initially much softer, is also lowering its rate. Since the euro has only risen in the past two years, we are confident that the market has not yet processed the ECB's policy easing. Therefore, as before, we expect only a decline in the EUR/USD pair, with the goal of price parity not seeming unrealistic.
It is somewhat naive to say that a new long-term trend has begun this week. Next Friday, reports on the US labor market and unemployment will be published, and if the market sees values that it does not like, the US dollar could fall again. The market will likely expect the Fed to cut rates by 0.5% on September 18 and will react to this scenario. Recall that at the beginning of the month, the market had similar expectations and priced in an immediate 50-point rate cut. Then, its expectations softened, but this did not make it easier for the dollar. This is how the euro has been rising. The market expects the most from the Fed, so it becomes disappointed with this assumption, but the dollar does not return to its original position.
What we've seen in recent days could be a correction before a new upward movement phase. We believe that if the market is genuinely prepared to buy the pair for another month or two, then at least the correction should be noticeable, rather than just 100 pips. It's worth noting that the CCI indicator has entered the overbought territory three times and has shown half a dozen bearish divergences. Shouldn't this result in at least a correction? Although, that's a rhetorical question. If the US shows weak data next week, the dollar could plummet back into the abyss. On the other hand, if the data are mediocre but the dollar rises, it could indicate that the illogical upward trend is ending.
The average volatility of EUR/USD over the past five trading days as of August 30 is 71 pips, which is considered average. We expect the pair to move between the levels of 1.1008 and 1.1150 on Friday. The upper linear regression channel is directed upwards, but the global downward trend remains intact. The CCI indicator entered the overbought area three times, signaling a potential shift to a downtrend and highlighting how the current rise is illogical.
Nearest Support Levels:
- S1 – 1.1047
- S2 – 1.0986
- S3 – 1.0925
Nearest Resistance Levels:
- R1 – 1.1108
- R2 – 1.1169
- R3 – 1.1230
Trading Recommendations:
The EUR/USD pair continues its strong upward movement due to the market's relentless desire to buy euros and sell dollars. In previous reviews, we mentioned that we only expect declines from the euro in the medium term, but the current rise now seems almost like a mockery. The market continues to seize every opportunity to buy, but the technical picture warns of a high probability of the uptrend ending. Short positions can be considered, as the price has barely settled below the moving average this week, with targets at 1.1047 and 1.0986. There is a chance to see a more or less significant downward move.
Explanations for Illustrations:
Linear Regression Channels: help determine the current trend. If both are directed in the same direction, it means the trend is strong at the moment.
Moving Average Line (settings 20,0, smoothed): defines the short-term trend and the direction in which trading should be conducted.
Murray Levels: target levels for movements and corrections.
Volatility Levels (red lines): the probable price channel in which the pair will spend the next 24 hours, based on current volatility indicators.
CCI Indicator: Entering the oversold area (below -250) or the overbought area (above +250) means a trend reversal in the opposite direction is approaching.
