Eurozone Seeks Positivity

EUR/GBP

Key zone: 0.8700 - 0.8750

Buy: 0.8750 (on strong positive fundamentals); target 0.8850-0.8900; StopLoss 0.8680

Sell: 0.8700 (after a retest of 0.8750) ; target 0.8600-0.8550; StopLoss 0.8750

For the past two weeks, the fundamental backdrop for the European currency has been interpreted by the market as moderately positive. Among the latest developments, the European Commission is preparing to:

• Raise import duties on steel to levels comparable with U.S. and Canadian tariffs;
• Cut steel import quotas by nearly half as part of a new protective package.

In ECB monetary policy, no significant changes have occurred. Chief Economist Philip Lane stated that a return of inflation to pre-pandemic lows is unlikely, while the probability of inflation significantly exceeding the 2% target is minimal. This stance indicates the completion of the ECB’s monetary easing cycle.

Conclusion: the rate differential between the ECB and the Fed will narrow, reducing the yield spread between U.S. Treasuries and German Bunds. Historically, this factor has always favored euro appreciation against the dollar.

As long as U.S. stock indexes continue to climb and the Fed keeps cutting rates amid labor market cooling, the probability of EUR/USD rising will increase.

Technical corrections, however, remain inevitable. The latest pullbacks in EUR/USD and euro crosses were tied to profit-taking after the Fed’s rate cut and the release of strong U.S. data, alongside equity market adjustments. Still, the subsequent rebound in the S&P 500 and dovish rhetoric from FOMC members supported the euro.

At present, the euro is rising ahead of eurozone inflation data. A key factor will be the reaction to Germany’s inflation increase, which has now been observed for the second consecutive month.

The British pound strengthened after the Nationwide Building Society report showed U.K. house prices rose 0.5% in September, following a 0.1% decline in August. GBP/USD gained 0.2% to reach 1.3474, though the cross with the euro has yet to display a clear trend.

In the coming days, the main driver for the market will be the risk of a U.S. government shutdown and a weakening dollar. This sets the stage for a fresh upward impulse in euro-related assets.

So we act wisely and avoid unnecessary risks.

Profits to y’all!