Euro Talking Points:

  • This morning brought the October rate decision from the ECB and the press conference with the European Central Bank which raised rates by 75 basis points.
  • The press conference prompted some bearish spending from Christine Lagarde and the lack of forward guidance from the bank leaves traders wondering what the ECB’s next move might be. Lagarde warned that more rate hikes are coming, but the size and scope are unknown. The next policy meeting of the ECB will take place on December 15.
  • The analysis contained in the article is based on price action and graphic formations. For more on price action or chart patterns, see our DailyFX Training section.

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EUR/USD was in the middle of its strongest week in four months ahead of the ECB’s 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 incentivize banks to lend. But with rising rates, this policy essentially becomes a subsidy to the banking sector and Lagarde announced today that the program would be amended to adjust the rate to the current ECB deposit facility rate. This will effectively increase the cost of borrowing for European banks, so in essence it is the removal of another stimulus tool.

The other big question mark remains unanswered and that is what the ECB plans to do with the balance sheet. The ECB is currently sitting on a portfolio of 8.8 trillion euros, but Lagarde has focused for that on the bank’s next rate decision in December.

On rate policy – ​​there’s no forward guidance from here, all we have are simple hints and Lagarde’s assertions this morning that further hikes are In progress. This could allow the ECB to be more nimble and with the use of inter-meeting commentary, similar to Fed language, the bank can essentially try to push rate expectations back and forth depending on economic conditions. But – and this is a big but – if markets remain skeptical of the ECB’s execution, given that the Fed has issued some very hawkish forward guidance, this could be a point of vulnerability, especially given the importance of the EUR/USD spot quote for the European economy.

EUR/USD

I started to consider the possibility of a deeper pullback from the EUR/USD bearish theme last week, and that was really helped by a few things, of which the USD was key.

The US Dollar had built a double top formation, which is bearish, and that top held thanks to two rather thoughtful drivers, suggesting that a countertrend move may be in play there. This USD formation has already filled in and the price has already reached the expected target from the formation at 109.62.

But, given the weighting of the Euro in the DXY quote (57.6%), it was unlikely that the USD would fall without at least some bullish action on EUR/USD, and it started to show. Friday.

I looked into the matter again on Monday this week, and by then EUR/USD had already pushed for a resistance test at a very key spot on the chart. The .9900 level was confluent with a downtrend line and as I shared there, a break above would likely trigger shorts, with more potential for this at the psychological levels of .9950 and 1.000. It played out and price ran to my next resistance point at 1.0095 which helped set the high this morning just ahead of the ECB.

During the ECB meeting, the pair’s prices retreated and even came back below the parity level until support appeared at Tuesday’s high, drawn around 0.9977. This has since led to a rebound and this leaves the door open for further bullish scenarios as we now have another higher high which has so far found support at previous resistance which could be a higher high down.

EUR/USD two-hour chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD: reversal or decline?

At this point, I’m still of the opinion that this is a short squeeze type scenario. Given how aggressive the downtrend has been since February and the recent pullback in energy prices with some fear dissipating around Europe’s situation this winter, and it was only logical that we would see action from countertrend and, given how long the move was that there would be stops lodged above these psychological levels which could lead to a quick momentum-based move as each level comes into play.

But, that said, there could be more room to run on this theme. My next point of resistance is confluence with the 23.6% Fibonacci retracement of the May 2021 to September 2022 selloff, and that is at 1.0198; and above is a major level of long-term importance at 1.0350, which was a 2017 low and helped stall selling this summer from May to August. It would be a major decision point if it could come into play.

And given the pilots headlined next week, we should consider such a scenario as a possibility. Tomorrow will bring the Core PCE, the Fed’s favorite inflation gauge, and next Wednesday will bring a highly anticipated FOMC rate decision.

EUR/USD weekly price chart

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Chart prepared by James Stanley; EURUSD on Tradingview

European stocks

If you listened to Lagarde’s comments at the press conference this morning, there wasn’t much positive. It appears the bank is raising rates because it has to and, as it has repeatedly pointed out, there are significant headwinds in the European economy.

Nevertheless, European equities continue to climb, as they have since the release of last month’s US CPI on October 13th. I drew a red trendline on this move on the chart below, highlighting the rapid pace of this rally even though the data remained quite gloomy.

As our own Tammy Da Costa pointed out yesterday, the DAX had even begun testing some key longer-term resistances, such as taken from the top of a falling wedge pattern.

Buyers forced a breakout in this trend this morning and the index is now trading at a new monthly high.

Two-hour DAX chart

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Chart prepared by James Stanley; DAX Futures on Tradingview

DAX Falling Wedge

Falling wedges are often followed for bullish reversal potential. The logic is such that sellers are anxious around the lows or at support, while remaining aggressive at the highs or near resistance, and this is something that may be the first sign of easing downside pressure. After all, if the sellers were really aggressive, they should be making new lows after support kicked in, right? And if they aren’t, there’s probably a reason for that.

Looking at this on the weekly chart we show that we are just starting this test, even with the intraday break above this level and the index has already made a strong move from the lows of a while ago. just a few weeks, currently showing at just under 12%.

So running here could be a challenge, but a continued push from the bulls could reopen the chart from above. It’s hard to justify a bullish stance from a fundamental perspective, but it’s been the case for a month and that hasn’t stopped buyers from continually pushing the envelope. So, in these situations, it is best to follow the price until evidence of a reversal comes into play.

DAX Weekly Chart

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Chart prepared by James Stanley; DAX Futures on Tradingview

DAX short-term levels

At this point there is a large confluence area that can act as support and there has already been resistance at a few different points. This sits between the Fibonacci levels at 12,966 and 13,115. If the sellers can land a reversal through this level, we may soon have bearish scenarios in the picture, but I would be cautious on that front until then. that we have confirmation.

For the next few resistance levels, I am following the price moves prior to 13,447 and 13,572. If these come into play, we will have a more confirmed break of the longer-term wedge, thus adding to the bullish nature of the movement that we have seen over the past few weeks.

DAX daily chart

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Chart prepared by James Stanley; DAX Futures on Tradingview

— Written by James Stanley, Senior Strategist, DailyFX.com and Head of DailyFX Training

Contact and follow James on Twitter: @JStanleyFX

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