European Central Bank President Mario Draghi added fuel to the fire during his latest press conference which followed the regulator’s meeting and rate decision. Super Mario expressed cautiousness not only about the economic slowdown but also about the lack of inflationary pressure which is the key factor for the ECB to stop injecting enormous additional liquidity to the system. Investors had a hope that the quantitative easing programme will be over by the summer of 2019, however, these terms are under a big question now. In case if the situation worsened, ECB would keep supporting local companies by ultra-soft monetary policy and the lack of speculative capital flow in EUR securities would pressure on the currency.
On the other side of the Atlantic, the interest rates had been increased more than two years, and the Federal Reserve is not going to stop tightening. The 10-year Treasury yields are hovering near 7-year peak due to the fixed-income market expectations of one more rate hike in December this year and two more rate hikes in 2019. The interest rates differential makes the greenback much more attractive for the borrowing capital speculator, adding demand for EUR/USD PUT options. Gross Domestic Product is growing at a sustainable pace and durable goods orders increase while the negative surplus of trade balance is narrowing due the exports.
Besides the robust economic growth and the historically low unemployment rate in the U.S., there is also a growth in average hourly earning which influences the consumer spending and thus, inflation. PCE deflator index, which is the main report for the Fed to monitor, stays well above the regulator’s target range. Several Federal Open Market Committee Members noticed a pick up in the inflationary momentum recently and more acceleration is expected from that side. The Federal Reserve has nothing to do but to keep hiking interest rates in order to prevent the overheating of the economy.
One more factor had a significant influence on EUR/USD. The global economic concerns, emerging market turbulence and the risk aversion made investors recall the greenback’s role of the safe-haven asset. The additional demand for the world reserve currency weighs on EUR/USD. The most heavy-volume currency pair is vulnerable to the equities growth and the stock indices’ crash is adding pressure on the pair. Euro-dollar breached 6-weeks consolidation channel last week, sliding towards 1.1300 support, the second time this year. The latest bottom has been found at that level in August, however, the second test might be successful for the euro bears.
Technically speaking, the long-term outlook is also negative for the pair. The recent upside swing showed nothing but the bulls’ weakness as EUR/USD failed to break through the Simple Moving Average (89 period) and the Exponential Moving Average (55 period) resistances. Both lines are in the bearish mode, exactly in the same way as it happened at the beginning of 2018 when the pair declined for more than 900 pips (four-digit quotes) in less than two months. The descending channel is still in play with the lower range too far from current levels, leaving the room for the bears to post new achievements. Once the static support of 1.1296 will be breached, EUR/USD might completely lose the ground with the nearest technical support around the parity of the euro with the greenback.
As the conclusion, we would recommend watching the upcoming development of the situation very closely, especially to the long-term traders. The demand for PUT options for EUR/USD might surge in case if the support level near the yearly lows will be breached, and CALL options defensive traders will have nothing to do but to shift the demand level lower than 1.1200, closer to 1.1000. Short-term traders should consider intraday bullish whipsaws in order to buy PUT options for the pair, monitoring technical reversal signals.