31.10.201802:03 Forex Analysis & Reviews: EUR/USD: the euro holds its position against all odds

The European currency has lost another foothold after today's release of data on the growth of the eurozone economy. In the third quarter, economic growth slowed to four-year lows: on a quarterly basis, the indicator rose to 0.2% (with a forecast of 0.4%), in annual terms to 1.7% (with a weak forecast of 1.8%). The GDP of France and Italy also disappointed – the French indicator came out at the level of 0.4% (experts expected growth to 0.5%), and the Italian at all at zero level with a growth forecast of 0.2%.

The published figures left the euro-dollar pair at the mercy of bears, who were able to reduce the price to the middle of the 13th figure against the backdrop of the strengthening of the US currency. The dollar index on Tuesday has updated its annual high, reaching 96.66 (at the moment), reflecting its dominance in the market. However, the EUR/USD bears could not take advantage of the situation to break through the resistance level of 1.1340 (the lower line of the BB indicator on the daily chart) to open the next price niche 1.1340-1.1301. And although the pair retains a pronounced bearish attitude, the bears' actions do not look so aggressive.

First, traders were ready to slow down the European economy – the GDP index slightly "went" beyond the projected figures, but in general, such dynamics did not cause a "pain shock". Even the head of the ECB last week admitted that the momentum of economic growth has weakened, although the incoming data correspond to the projected growth of the European economy. Of course, after Tuesday's release, Draghi can somewhat soften his position, but if we talk about the current moment, there are no prerequisites for panic.

Secondly, traders are concerned about the fact of the growth of the dollar. Another collapse in the stock markets may affect the determination of Federal Reserve members regarding the pace of monetary tightening. For example, yesterday trading on the US stock exchange ended with a significant decline in three key indices. Thus, the Dow Jones index fell by 0.99% (to 24442.92 points), S&P 500 – by 0.66% (to 2641.25 points), and NASDAQ – by 1.63%. Such dynamics is observed more often - for example, last Thursday the Dow Jones lost about 2.5%, S&P 500 – more than 3%, while NASDAQ collapsed by 4.5%.

Meanwhile, the yield on 10-year Treasuries continues to grow, reaching 3,119% at the moment. The market actually ignored the decline in the basic price index of personal consumption expenditure (PCE), focusing on the growth of the US economy in the third quarter (let me remind you that the figure was at 3.5%, exceeding the forecast level). The probability of a rate hike at the December meeting is estimated at 70% (up to 2.5%), and the chances of a spring increase (up to 2.75%) are 44%. This state of affairs contributes to escaping from American risky assets, as from the point of view of the risk/return ratio, investments in stocks relative to investments in bonds become less attractive.

In other words, given the frequency of "collapses" in the US stock market, the Fed will not be able to ignore the situation. Members of the regulator are unlikely to abandon the December hike, but may take a more cautious position on future prospects. Trump also adds fuel to the fire, which directly connects the Fed's policy with the situation in the stock markets.

As a result, there is a somewhat paradoxical picture: on the one hand the problems of the European currency – the Italian budget, political events in Germany and the slowdown in GDP of the eurozone. On the other hand, there are uncertain prospects of the dollar against the background of frequent collapses in the stock markets. Also, we should not forget about the midterm elections to Congress, the results of which Democrats can get a majority in The House of Representatives. According to experts, if this scenario is implemented, we are waiting for a "big sale" of the dollar due to increased political uncertainty.

Such a controversial fundamental background keeps the EUR/USD pair from moving sideways, although bulls and (especially) bears are trying to leave the price range of 1.1340-1.1385. It is likely that Wednesday's release of data on the growth of European inflation will support the pair - according to general forecasts, the consumer price index should remain at the same level at 2.1%, while core inflation may return to 1% after falling to 0.9% . The data on the growth of German inflation published on Tuesday instills hope in this - the indicators turned out to be better than expected, and in annual terms the index even updated the annual high. Therefore, the European dynamics can also pleasantly surprise the EUR/USD bulls - in this case, they will make another attempt to assault the 14th figure.