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Abstract: After concluding Thursday's monetary policy meeting, markets are widely expecting the ECB to leave interest rates unchanged for the first time since early 2022. EURUSD could fall further towards 1.0700. Thus, investors will not place new bets on the asset until the ECB makes a major policy announcement.

Fundamentals

The ECB is at a key crossroads in its policy decision. The bank will face its toughest decision since it started raising rates in July 2022 due to heightened stagflation risks.

In August, the Eurozone annual inflation came in at 5.3%, down sharply from the 10.6% recorded in October 2022. However, core inflation remained above 5.0% compared to the ECB's 2.0% inflation target.

Slowing inflation and the closing window of opportunity are the main reasons why the ECB could not raise rates today. Although it will be a difficult decision, the downward trend in inflation remains too shallow for many members of the ECB's governing council. Moreover, the window of opportunity is likely to close after today as inflation begins to ease at an accelerated pace. As a result, the ECB will leave interest rates unchanged for the first time since early 2022.

It can be assumed that even the ECB's Governing Council "won't know until the last minute what the outcome of the discussion or vote will be". After all, there are pressing enough reasons on both sides (to raise or not to raise rates), even if the ECB's sole inflation mission is always given more weight. Besides, we expect the ECB to leave its key rate unchanged. Nonetheless, the question does not seem to be whether the ECB will raise rates, but whether the accompanying wording will be the deciding factor in stimulating markets. If that is the case, there is a risk that EURUSD could see a pull higher before falling further below 1.0700.

Technical Analysis

The EURUSD continues to face pressure as investors prepare for key events in the center of Europe.

In terms of momentum indicators, the Stochastic Oscillator is in the oversold area but has surpassed its moving average and looks poised to move higher. This could be the signal the bulls have been waiting for to make a proper rally and test the upper trendline.

The rest of the momentum indicators remain biased towards the short side. Specifically, the Average Directional Movement Index (ADX) is moving slightly lower and is approaching the threshold of 25, thus suggesting that the EURUSD bearish trend is weakening. More importantly, the Relative Strength Index (RSI) confirms the existence of a bearish trend in the market, as the indicator has been below the middle level of 50 since the end of July.

Furthermore, if the bulls decide to rebound, they may try to complete a test of the supply zone at 1.0792 before moving further higher and testing the downward-sloping trendline on July 17th, 2023. Any further move higher should continue to pull back after the completion of that trendline test. After all, the asset has previously fallen below its 200-day SMA. (A fall below it signals the beginning of a trend reversal)

On the other hand, shorts can capitalize on the momentum of any short-term spike by taking short positions higher. Then, try to break below the busy 1.0720-1.0727 range, and lay a solid foundation for a drop below the 1.0700 handle. After that, they could hit new 2023 lows.

In general, the market may remain on hold until the next key event. Therefore, it is recommended to go short at highs.

Trading Recommendations

Trading direction: Short

Entry price: 1.0780

Target price: 1.0658

Stop loss: 1.0830

Validity: 23:55:00, 09/28, 2023

Support: 1.0720/1.0705/1.0692

Resistance: 1.0752/1.0767/1.0792