- EUR/USD declines as the US Dollar (USD) gains strength from safe-haven demand.
- Rising tensions in the South China Sea, with China increasing military activity near Taiwan.
- Traders are selling the Euro in anticipation of a potential rate cut at the ECB policy meeting on Thursday.
EUR/USD is trading in the 1.0920s on Monday, slightly lower for the day as the US Dollar (USD) draws safe-haven flows amid rising geopolitical tensions related to Taiwan. The Chinese People's Liberation Army (PLA) is conducting military drills in the region, prompting a spokesperson from the US Department of State to express serious concerns regarding the PLA's activities in the Taiwan Strait.
EUR/USD Faces Pressure Ahead of ECB Meeting
EUR/USD is likely to come under increasing pressure as traders sell the Euro (EUR) ahead of the European Central Bank (ECB) meeting on Thursday. Analysts expect the ECB to announce another 25 basis point (bps) rate cut, marking the second consecutive reduction. This anticipated cut could weaken the Euro further, as lower interest rates generally lead to reduced foreign capital inflows.
In September, Eurozone headline inflation dropped to 1.8%, falling below the ECB’s 2.0% target for the first time in over three years. This decline, coupled with a slowdown in economic activity, has heightened expectations for an additional rate cut on Thursday, signaling a significant shift in the ECB’s easing cycle.
In the US, trading floors are expected to be mostly empty due to the Columbus Day public holiday on Monday. While some equity trading will continue, the US bond market will remain closed. Investors are also bracing for a 25 bps rate cut from the Federal Reserve (Fed) in November following the recent US Producer Price Index (PPI) data, which showed headline PPI stagnating at 0.0% in September, below the expected 0.1%. Core PPI inflation also slowed to 0.2% from 0.3% in August. Although annual readings presented a mixed picture, the monthly data weighed heavily on sentiment, along with a decline in the preliminary US Michigan Consumer Sentiment Index for October.
The CME FedWatch Tool now indicates a 90% likelihood of a 25 bps Fed rate cut, up from 83% prior to the PPI report.
Technical Analysis: EUR/USD Bounces Off 100-Day SMA
EUR/USD has broken below a key trendline and declined to the 100-day Simple Moving Average (SMA), where it has found support and bottomed out.
EUR/USD Daily Chart
The pair appears to have formed a Double Top bearish reversal pattern at the August and September highs. This pattern is confirmed following a break below the neckline at the September 11 low of 1.1002.
The initial downside target for this pattern is set at 1.0872, corresponding to the 61.8% Fibonacci extension of the pattern's height extrapolated downward (indicated by the blue shaded rectangle on the chart). Additional targets include 1.0874, aligning with the 200-day SMA, and 1.0824, based on the trendline break. Furthermore, momentum, as indicated by the Relative Strength Index (RSI), is moving in tandem with the price action, suggesting a bearish outlook.
