Euro analysis: Dollar rally pauses, EUR/USD decline narrows

On Friday (October 10), the euro/dollar rallied slightly in European trading. The pair traded above 1.1572 after hitting a new two-month low near 1.1540 yesterday. The euro has lost more than 1.4% this week due to political and fiscal uncertainty in France, putting it on track for its worst week of the year.

Analysts at ING say that if the euro falls against the dollar again, expect more aggressive buying near the level of 1.150, which implies more than 2 per cent upside in the short term - provided, of course, that the dollar-euro swap spread does not widen further. Analysts still prefer to see the exchange rate recover to the level of 1.170, although this process may not be very smooth and will not develop in a single direction.

Analysts say the dollar, on the other hand, is gaining support from concerns in France and similar problems in Japan, where the pro-stimulus Liberal Democratic party candidate, Tsuneae Takayoshi, is seen as a frontrunner for the next prime minister. Moreover, recent dovish comments from Federal Reserve policymakers have failed to dent the dollar's strength as the US government shutdown has delayed the release of most economic indicators.

The market is pricing in a 95 per cent chance of a 0.25 percentage point cut in October, although the chance of further easing in December has fallen to 80 per cent, down from 90 per cent a week ago.

In Friday's economic calendar, the University of Michigan Consumer Sentiment Index is expected to show a further decline in consumer confidence in October.

Sebastian Le Corny unexpectedly resigned earlier this week as markets awaited the appointment of a new prime minister by President Emmanuel Macron, who will face the difficult task of pushing through an austerity budget and a backlash in parliament that has forced five prime ministers to step down in the past two years.

For the French political news on Wednesday, the weak and short-lived euro rally in the market is understandable. While the 10-year spread between German and French bonds has fallen back to a low of around 80 basis points, the more forward-lookingforeign exchange marketStill, investors have little reason to be optimistic about the euro.

With the announcement of the new prime minister due today, it is widely believed that the new prime minister's political support base remains very weak. Although the outgoing prime minister Leconou promised to meet the government's budgetary obligations to reassure the market, these promises were clearly not enough to allay concerns about the stability of the French government.

That said, it is still difficult to see the euro's real impact beyond the short term. However, in any case, the euro may still gain some favor from today's new prime minister's statement.

If US employment data, whenever it is released, is trending more towards weakness than strength, and if next week's CPI data supports the Fed's view of a rate cut in October, then the political risk in France could turn negative for the wider European bond market, putting continued downward pressure on the euro/dollar. For now, there are no conditions for this to happen. Despite the complexity of France's budget situation, market vigilance usually leads to more fiscal caution; the situation in the UK after Truss, and the example in Italy before, is evidence of this.

technical analysis

(EUR/USD 4-hour chart source: Internet)

The exchange rate fluctuations of the euro against the dollar in recent months have formed an upward channel, and the exchange rate has fallen below the support line S. After falling below 1.16600, the downward trend of the euro against the dollar has continued.

In mid-September, the exchange rate entered a supply zone above the previous high near 1.1790 and the psychological threshold of 1.1800. As the "Liquidity Sweep" pattern shows, smart money seemed to be taking short positions at the time.

Since then, the market has been seeking liquidity in the opposite direction. On the EUR/USD chart, we have identified an area of potential demand near key points, including: the lower track of the blue ascending channel; 1.1530, where long stop-loss orders are possible; and 1.14500 support.

From a bearish perspective, the market is currently in a downward channel; the median line of this channel and the previous local support level of 1.1600 may constitute resistance.

Based on the above analysis, in the short term, the market remains bearish; in the medium term, bearish pressure may ease, and the euro may enter a consolidation phase against the dollar.

Whether this trend can be realized and in what form it will take will largely depend on the news and political developments in the United States and France.