EUR/USD Forecast: ECB to give bulls a reality check

The EUR/USD pair has reached a fresh seven-week high of 1.1152 this Friday, amid a better perception of risk factors fueling demand for high-yielding assets in detriment of the greenback. The initial catalyst for the pair’s rally was the announcement that the United Kingdom and the European Union made an accord on the UK’s departure from the Union. Optimism cooled down after the DUP announced it doesn’t support such a deal. The UK Parliament will have an extraordinary session this Saturday, anticipating opening gaps next week, probably larger in GBP crosses but extending into most major pairs.

Things were quieter in the US-China trade front after the latest round of negotiations ended on a high note last week. Both countries are set to continue negotiating, although there’s no certain date on when representatives are to resume talks. A comfortable tension persists, although the matter has been set aside and overshadowed by Brexit.

Upcoming signs of economic health

The positive sentiment has underpinned the shared currency, but is it enough? It is in the short-term, but at some point, the market would take account there are no valid reasons to keep buying the EUR.

European data has been signaling a steepening economic slowdown, and there have been market talks suggesting fiscal stimulus in Germany. Macroeconomic figures released these days confirmed that the downturn would extend into Q4, with September inflation steady at 1.0% YoY. In this scenario, the ECB would need to keep stimulating the economy. Not that the US may not follow the same path, but despite fears, it is not there yet.

Believe it or not, a Brexit deal could save the EU. Over the past three years, rivers of ink have been wasted on what would the effects be for the UK, ignoring the other half of the equation. European politicians have hidden their concerns pretty well, but the fact that they approved in a blink PM Johnson’s proposal after offering an extension, should ring some bells. This weekend events could be critical for European currencies.

Fresher signs of EU economic developments will be out next week, as Markit will release the preliminary estimates of October PMI. The ECB is scheduled to meet and announce its latest monetary policy decision next Thursday. It will be Mario Draghi’s farewell, as the current President of the central bank ends its mandate by month-end, and will be replaced by Mrs. Christine Lagarde. It seems unlikely, therefore, that he will make shocking announcements.

In the US, the most relevant macroeconomic figures will be September Durable Goods and the preliminary October PMI.

EUR/USD technical outlook

The pair is now trading some 300 pips above the multi-year low set this September, up for a third consecutive week. In the long run, the bearish trend is finally giving some signs of easing, although there’s a long way ahead before a bullish trend surges.

In the weekly chart, the pair is battling with a bearish 20 SMA, the first time around it since early August. The 100 and 200 SMA remain far above the current, while technical indicators continue advancing, approaching their midlines from below.

In the daily chart, the pair is crossing above its 100 DMA, also for the first time since early August, although back then, it failed to surpass the indicator. The Momentum keeps heading north, despite being in extreme overbought readings, while the RSI is barely decelerating near 70, favoring additional gains ahead, particularly if the pair closes the week above the critical 1.1160 resistance. Beyond it, the next possible target comes at 1.1200.

The 1.1100 figure is the immediate support, with a break below it putting the pair again in the bearish path. The next supports come at 1.0940 and 1.0870.

EUR/USD sentiment poll

The FXStreet Forecast Poll indicates that the ongoing advance is corrective, and could extend next week, as 82% of the polled experts are bullish. Such a stance offers a drastic U-turn, as, in the monthly view, bulls account for 15%, while bears jump to 85%, with the average target below 1.1000. In the three-month view, bears retain the majority with 80%, targeting on average 1.0937.

The Overview chart shows that in all the time-frame under study, chances that the pair moves beyond 1.1200 are quite limited. The short-term moving average is firmly bullish, with the momentum fading in the 1-month view, to turn flat in the longer-term perspective.

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