EUR/USD Forecast: dollar rallied as safe-haven, will keep rallying on self-strength

• EU data disappointed and US figures were upbeat but market's attention was somewhere else.
• EUR/USD at an inflection point, to recover ground if 1.1300 holds.

The common currency had another bad week, compliments to Italy and the ECB. Tensions between Italy and the EU amid the budget are no news but are worrisome enough to keep investors away from the EUR. Escalating concerns this week and in an unprecedented move, the EU rejected Italian's coalition government draft budget, claiming that the deficit target and overly optimistic growth estimates posed a serious threat to economic stability in Europe. The country has three weeks to submit a revised version. On Thursday, and adding fuel to the fire, the Italian Economic Minister Tria responded that the government thinks the budget is correct and sees no reasons to present a new one to the EU Commission. No progress in Brexit added to EUR's doom and gloom.

The ECB had a monetary policy meeting but as largely expected, policymakers took no action, leaving benchmark interest rates unchanged. Policymakers confirmer their plan to end monetary easing by year-end, something largely anticipated. Net purchases of assets have been reduced to €15 billion until next December.  Within the press conference, Draghi tried to pour cold water over the Italian situation, saying that he is confident both parts involved will reach an agreement. He repeated that significant stimulus is still needed for inflation, adding that he expects it to pick up toward the end of the year, despite the weaker momentum.  By the end of the press conference, he said that  Europe’s monetary union remained “fragile” as long as measures to shore up existing structures were not complete, referring to a banking union.  

Macroeconomic data didn't help, as preliminary October Markit PMI for the EU came in well below expected, with the only exception of French readings, but leaving the EU Composite PMI  at 52.7, the slowest rate of growth in two years, led by an export slowdown and weakness in the services sector, according to the official release.

In the US, on the contrary, data was generally upbeat, as the Markit Manufacturing PMI for October jumped to 55.9, while the Services reading came in at 54.7, both above market's expectations and the previous readings. Also, the first estimate of Q3 GDP came in at 3.5% vs. the expected 3.3%. And while the greenback rallied as safe-haven, these numbers suggest it could continue rallying on self-strength next week.

The upcoming week will be a busy one, starting with US core PCE inflation for September and ending with the US monthly Nonfarm Payroll report. In the middle, the EU will release Q3 GDP and fresh inflation figures. For sure, US data will have its saying on USD moves, but that doesn't decrease the possible influence of risk sentiment.

 

EUR/USD technical outlook

The EUR/USD pair trades a handful of pips below the 1.1400 level ahead of the weekly close, bouncing from a daily low of 1.1335. Flat for the day, but down for the week, the pair is poised to extend its decline according to technical readings. In the weekly chart, the pair opened and fell below the 100 SMA, which capped the upside and develops below a bearish 20 SMA. The 200 SMA stands a few pips below the mentioned low, close to the yearly one at 1.1300, which means that a break below it will be a strong signal of downward continuation. Technical indicators in the mentioned chart have accelerated their declines, now at their lowest since last August.

In the daily chart, readings also favor a downward extension, with the Momentum indicator heading firmly lower and the RSI hovering around 33, as the price develops further below bearish moving averages.

Below 1.1300, the next strong support comes at 1.1260, while once this last is cleared, 1.1140 comes as the next possible bearish target. 1.1430, former October low, is the first resistance ahead of the 1.1520 price zone. Gains beyond this last seem unlikely for the upcoming days.

 EUR/USD sentiment poll

The FXStreet Forecast Poll shows that bears are still dominating the pair, at least in the 1-week view, although the number of those going short decreased from 67% to 47%, with the average target downgraded from 1.1434 to 1.1357. Sentiment turns positive in the 1 and 3 months views, with bulls up to 62% in the quarterly perspective, and the average target then at 1.1460, down from 1.1529 previously.

However, the Overview chart shows that bulls are not that convinced: in the three time-frames under study, the moving averages maintain their bearish slopes and, in the 1 week and 1-month cases, with the largest accumulation of targets below the current level. In the 3-month view, however, seems likely that the pair will be somewhere closer to the 1.16/1.18 price zone.

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