Euro Expected To Rebound To 45-Degree Angle In Line With Correction

FX market highlights:

• US personal income decreased, spending increased.
• Dollar firmed on reallocation of capital flows on the last day of the month.

The steepest gains against the US dollar were seen at the end of the week in the Australian dollar (+0.70%), the New Zealand dollar (+0.23%), and the Swiss franc (+0.10%). Losses were posted by the euro (-0.72%), sterling (-0.50%), the Japanese yen (-0.45%) and the Canadian dollar (-0.11%).

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The EURUSD pair declined by 1.0% to 1.1561 on Friday, October 29. The single currency started losing ground against the dollar, which rebounded at the opening of the Asian session. Selling picked up during the European session with a drop in the EURGBP cross pair and intensified during the North American session. The euro fell 1% against the dollar and 0.76% against sterling.

The US10Y yield showed a multidirectional dynamic, rising during the first half of the day, and falling during the second. The US10Y yield did not did not contribute to the downturn in the euro.

The greenback may have strengthened due to the reallocation of capital flows on the last day of the month and expectations that the Fed will soon start to taper QE. Given that the Fed is ready to tighten monetary policy, and the ECB remains dovish in the face of rising inflationary pressures, the euro immediately comes under pressure when sentiment shifts.

On Friday, a new batch of macro data came out stateside. US personal income for September decreased 1% compared to the previous month. Conversely, personal spending increased 0.6%. According to the median forecast, income was expected to decline by 0.3% and spending to increase by 0.6%.

Today’s macro agenda (GMT+3)

• 10:00 Germany: retail sales (September)
• 11:30 Switzerland: manufacturing PMI (October)
• 12:30 UK: Markit/CIPS manufacturing PMI (October)
• 16:45 US: Markit manufacturing PMI (October)
• 18:00 ISM manufacturing (October)

Current outlook

By the time of writing, most major currencies were trading slightly in the red. The single currency was changing hands at 1.1555. The dollar remains well bid after the release of weak Chinese macro data on Sunday.

The PMI for China’s manufacturing sector came in at 49.2 in October (missing the 49.7 forecast, and below 49.6 in September), which is the second month of decline, while the PMI for non-manufacturing stood at 52.4, down from 53.2 in September. Industrial activity declined due to power shortages and soaring commodity prices.

This week, market participants will be focused on three key events: the FOMC meeting, the Bank of England meeting and US NFPs.

Technical analysis

On Friday, EURUSD dropped to the 135-degree angle of the Gann fan. Within 14 hours the price reverted to a correction. If the pullback was due to month-end reallocation of capital flows, the euro may could retrace to 1.1650 before the Fed’s rate decision. However, if the main reason for the downtrend is Fed-ECB monetary policy divergence, the euro is at risk of declining to 1.1350 by year-end.

The EURGBP cross is currently on an upward trajectory. So today the key pair could rebound to 1.1585 (45-degree angle). If price action continues to trade in the range of 1.1530-1.1585, on Tuesday the single currency could sink to recent lows. Ahead of the Fed’s rate decision, we are more inclined to see an upward correction than the continuation of euro weakness.