|

EUR/USD Forecast: Time to be thankful for profits? Three reasons for a downside correction

  • EUR/USD has risen amid Fed and data-related dollar weakness. 
  • The ECB minutes and virus concerns may cool the party.
  • Thanksgiving Day's four-hour chart is showing that the pair may soon enter overbought conditions.

How low can the dollar go? The greenback has been hit by three factors, but the euro also has its own reasons to fall and EUR/USD's ascent to the highest since September may suffer a setback. 

Why the dollar is down

1) Fed warming up the printing presses: The Federal Reserve's Meeting Minutes from early November showed that members dedicated a significant amount of time to discussing the Quantitative Easing (QE) program. The world's most powerful central bank conveyed calm and imminent urge to provide more support, but it is gradually moving in that direction. At least in the US, creating new money devalues the currency.

2) Short-term data is worrying: Ahead of the Thanksgiving holiday, the US released a big bulk of economic figures. The impressive increase in October's Durable Goods Orders encouraged markets and so did another robust housing figure. However, the back-to-back increase in jobless claims – seen for the first time in July – signals the labor market's recovery is hitting its limits. After the dust settled from the massive data dump, the downbeat narrative took hold.

See US Thanksgiving Wrap: Consumers carry October, November starts to look dicey

3) Coronavirus ravages the US: Another day, another COVID-19 hospitalization peak – for the 16th consecutive time. Infections remain at an elevated level and mortalities are nearing the heights seen in the spring. Thanksgiving travel can further exacerbate the situation and contribute to spreading the illness. 

Source: The COVID Tracking Project

These factors pushed EUR/USD to nearly 1.1950 at the time of writing. However, the time may be ripe for a correction.

Three factors that could trigger a EUR/USD fall

1) Minutes across the pond: It is now the European Central Bank's turn to release its meeting minutes. The protocols will likely reiterate the ECB's concerns about the impact of the virus on the economy and signal the upcoming monetary stimulus.

An expansion of QE is expected, but the size is unclear. Moreover, the Frankfurt-based institution may also opt for cutting rates, an option that has never been denied. While printing euros has helped the common currency in covid times, slashing borrowing costs has hurt it. 

2) Germany is struggling with the virus: The old continent's largest economy is set to impose new restrictions, contrary to the trend in France and Spain, which have bent the case curve. Chancellor Angela Merkel said that COVID-19 infections are still too high and that more action is needed to rein in the spread. Any slowdown in the "locomotive" would also hamstring the euro's gains. 

3) Nearing overbought conditions:

The Relative Strength Index on the four-hour chart is nearing the 70 level – reflecting overbought conditions, from where it is technically prone to a downside correction. Moreover, upside momentum remains relatively weak. 

The fresh high of 1.1940 is the first resistance line. It is followed by 1.1965, which was a swing high in the summer. The yearly peak of 1.2010 is the next upside target. 

Support awaits at 1.1920, which was a peak in early November. It is followed by 1.1895, a double-top in the middle of the month. Further down, 1.1850 and 1.1815 await the pair. 

More Markets return to normal, and traders may be loving it

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

More from Yohay Elam
Share:

Editor's Picks

AUD/USD sits at three-week highs above 0.7000 on hawkish RBA-speak

AUD/USD holds a positive bias for the fourth straight day, trading above 0.7000 in the Asian session on Wednesday and at three-week highs. RBA Deputy Governor Andrew Hauser's hawkish remarks and inflation concerns underpin the pair. However, the upside appears capped as the US Dollar attracts some buyers amid looming US-Iran uncertainty.

USD/JPY remains confined in a familiar range below 158.50

USD/JPY sees some dip-buying in the Asian session on Wednesday, though it remains confined within a multi-week range near 158.50 as the uncertainty over the timing of the next BoJ rate hike keeps Japanese Yen bulls on the defensive. Meanwhile, hawkish Fed expectations, bolstered by inflation risks stemming from volatile oil prices, underpin the US Dollar. However, looming intervention fears could limit JPY losses and cap the currency pair.

Gold appears slightly bid above $4,100

Gold prices manage to reverse three consecutive daily declines, trading just above the $4,100 per troy ounce on Wednesday. The yellow metal’s recovery comes amid a humble advance in the US Dollar, mixed US Treasury yields across the board and a widespread cautious tone from the US-Iran front.

Bitcoin eyes a break above $85,000 as institutional demand returns

Bitcoin edges higher above $83,000, extending its rebound from the 50-day EMA near $80,786. US-listed BTC spot ETFs recorded over $23 million in net inflows on Tuesday, following Monday's $526 million, signaling a return of institutional demand.

What November 3 means for the Fed's rate path and the US Dollar

The USD faces a decisive period ahead of the November 3 midterm elections. While markets anticipate another interest rate increase from the Fed in December, the battle for control of Congress could reshape fiscal policy expectations and, indirectly, the path of US monetary policy in 2027.

The US Dollar fell. Gold didn't rally. That tells you everything
Gold (XAU/USD) is struggling to capitalize on a weaker US Dollar (USD), after repeatedly failing to establish itself above the $4,200 level. The precious metal remains confined to a relatively narrow trading range despite a combination of developments that would normally support higher prices.