EUR/USD Forecast: Dead cat bounce or turnaround? Consumer confidence and “witching” eyed

  • EUR/USD has been licking its wounds from the dollar storm.
  • Wall Street's options expiry – "witching" – and data are eyed.
  • Friday's four-hour chart is showing bears are in the lead.

"Markets can stay irrational longer than one can remain solvent" – This quote, associated with renowned economist John Maynard Keynes, is relevant to EUR/USD trading – at least on a small scale.

The pair is off the lows, but the minor nature of the move implies it could only be a "dead-cat bounce" – a temporary upswing before the next fall. However, it could extend and become a turnaround.

While the dollar has taken a breather on Friday, safe-haven flows from earlier in the week mean euro/dollar is still under 1.18. Demand for the safe-haven greenback makes sense in the context of struggles in US stock markets. But why are equities struggling?

US Retail Sales beat estimates with a leap of 0.8% in August, contrary to estimates of a drop of 0.7%. Core figures also exceeded expectations.

US Retail Sales: The August divorce

On the other hand, yet another inflation gauge, from the Philly Fed Manufacturing Index,  pointed to easing prices pressures. It adds to the softer Consumer Price Index (CPI) data earlier in the week.

Recent figures paint a "Goldilocks" picture for markets – robust growth yet no substantial price pressures. The Federal Reserve may wait for longer before tapering its bond-buying scheme while the corporates could rake in more profits. 

More: US Data Analysis: Strong demand, weaker inflation, Goldilocks state for markets set to retur

One explanation for the pressure in stocks comes from the woes of Evergrande, China's second-largest real-estate company. The firm seems to be on the brink of bankruptcy. Nevertheless, Beijing could rescue the company and the impact on the US will likely be minimal. 

Another theory will come to a test on Friday – the expiry of multiple types of options, what is known as "quadruple witching Friday". Positioning ahead of the "witching" may have pushed shares lower, and once the dust settles, investors would return to their "buy-the-dip" mentality. In turn, the dollar could decline.

The greenback faces another test coming from the University of Michigan's Consumer Sentiment Index for September. Will it point to a recovery? The indicator tumbled to 70.3 points in August, below the pandemic trough, but that depressing statistic proved a poor predictor of retail sales, as seen on Thursday. 

US Michigan Consumer Sentiment: Markets will have to look hard for positive signs

In the old continent, the Financial Times reported that European Central Bank member Phillip Lane privately told bankers that rate hikes are coming as early as 2024. The news sparked a mini-upswing in the euro, but that waned out once the ECB denied the report. 

Final eurozone inflation figures for August are due out later, and will likely confirm that Core CPI jumped to 1.6% last month. 

Overall, fundamentals point to the dollar falling from its highs. 

EUR/USD Technical Analysis

Contrary to fundamentals, technicals are pointing lower. The Relative Strength Index on the four-hour chart is above 30, thus outside oversold conditions. Momentum is to the downside and the pair's recent stabilization has still left it under the 50, 100 and 200 Simple Moving Averages. 

Overall, bears are in the lead. 

Support awaits at Thursday's low of 1.1750, followed by 1.1735 and then by 1.1705. 

Resistance is at 1.18, which provided support in recent days. It is followed by 1.1845, a swing high, and then by 1.1885. 


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