03.09.202010:00 Forex Analysis & Reviews: EUR/USD. ECB against Euro

During today's Asian session, the euro/dollar pair still broke through the support level of 1.1830 (the middle line of the Bollinger Bands indicator on the daily chart, coinciding with the Kijun-sen line) and is now heading to the next support level of 1.1730 (lower line of the Bollinger indicator Bands on the same time frame). Some experts admit that the price decline will be more serious, that is, it will fall until the base of the 16th figure (where the upper border of the Kumo cloud on D1 is located). However, such conclusions look slightly rushed, considering that the data on the growth of the US labor market will be released tomorrow. Nevertheless, there are clearly certain prerequisites for a large-scale weakening of the euro. If the European currency recently enjoyed ECB's silent support, the situation has now changed dramatically. Philip Lane, the chief economist of the European Central Bank, recently expressed his opinion on euro's strengthening, putting significant pressure on the single currency. And if the regulator is still concerned about this issue at the next ECB meeting, then the buyers of the EUR/USD pair will have a hard time, even amid the dollar's uncertain positions.

It can be recalled that the price of the euro against the dollar has risen by more than a thousand points over several months. If the EUR/USD pair was trading in the range of 1.08-1.10 in the period from March to May, it is now trading in the range of 1.18-1.20. Even before this crisis, the price rarely approached the borders of the 14th figure – the pair fluctuated in the range of 1.12-1.13 at the beginning of the year, and dropped to the range of 1.09-1.11 by the end of 2019. But even in such conditions, European inflation showed slow growth. Therefore, it is quite obvious that the current state of affairs does not suit the members of the European regulator. A high exchange rate slows down inflation growth, which negatively affects the export sector and has a number of other effects.

On the other hand, many central banks of the world's leading countries were concerned about the strengthening of national currencies, after the dollar generally weakens. In particular, the head of the Reserve Bank of Australia and the Reserve Bank of New Zealand, voiced out the same rhetoric. A similar position was also expressed by the head of the Bank of Canada (the Canadian has strengthened 600 points to the greenback in just two months) at the last meeting. So, it would be surprising if ECB members calmly watched the process of strengthening the euro. The regulator already "silently endured" the revaluation process for several months. But as soon as EUR/USD came close to the level of 1.20, the ECB reacted immediately.

Thus, Philip Lane's speech made it quite clear that the current euro rate is unacceptable for the ECB. These words came after the release of extremely weak data on inflation growth in the eurozone countries. Let me remind you that the general consumer price index in the eurozone countries unexpectedly collapsed into a negative zone, reaching -0.2%. At the same time, the general forecast for inflationary growth was + 0.2%. The deflation in the euro zone was recorded for the first time since spring 2016. Meanwhile, the core consumer price index (core inflation), which clearly reflects consumer trends (therefore excludes volatile and essential goods such as food, tobacco and fuel), also slowed sharply from a July reading of 1.2% to 0.4 % in August.

Now, if we consider such inflationary dynamics, it can be assumed that the ECB will sharply react to the growth of the EUR/USD pair. Some experts suggested that the regulator will resort to currency intervention, although we can assume that their members will limit themselves to verbal intervention for now, including at the next meeting, which will be held exactly a week later. As you can see, the words of Philip Lane were able to calm the intensity of the EUR/USD bulls. The pair has retreated by almost 200 points from the two-year price high. Therefore, the members of the regulator will certainly try to "repeat the success" of their colleague by verbally putting pressure on the euro.

Thus, the pair will most likely decline to the first support level of 1.1720 (the lower border of the Bollinger Bands indicator on the daily chart) at least before the release of tomorrow's Nonfarms. However, it is difficult to predict a further decline, at least within the current week. If August Nonfarms is a disappointment (and there are certain prerequisites for this, given the dynamics of growth in the number of initial applications for unemployment benefits), then the 16th figure may be too tough for the pair's bears. Nevertheless, short positions to the bottom of the 17th figure in the short-term look very attractive.