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Abstract: The short-term price trend still has a potential positive tone for the EUR, but the spot price needs to hold the range of 1.0700 to get a chance of improvement in the short term.

Fundamentals

Thursday's meeting of the European Central Bank (ECB) will be held in a strongly divided signal about the next step. Inflation expectations remain high, and the negotiated annual wage growth rate exceeds 4%, which is unprecedented in the history of the eurozone. This obviously means that the medium-term price stability is threatened, so it is necessary to continue to tighten policies.

However, the economic activity data unexpectedly declined. Although this will be a very close decision, we finally expect the ECB to avoid raising interest rates again at its September meeting. However, it is expected that this decision will be hawkish.

On the market side, the EUR made a good start this week, prompting the EURUSD to climb to the high point of 1.0770 early on Tuesday. However, the USD regained some buying interest after a sharp correction on Monday, pushing the EURUSD back to trading near the negative range.

Considering that there is a certain degree of disagreement in the ECB, it seems that the market discussion tends to be suspended at the meeting on September 14, which is one of the important factors for the current weakening of the EUR. Before the watershed decision made by the ECB this week, hedge funds' bearish sentiment towards the EUR had reached its highest level since the beginning of this year.

According to the latest data from the Commodity Futures Trading Commission (CFTC), speculators held 6,421 net short positions last week, in sharp contrast to the net long positions of the previous week.

The management companies of the long-term assets have also cut their net long positions. With the high inflation rate, the market is increasingly worried about the deterioration of the economic growth prospects in the eurozone, and the bet on suspending interest rate hikes (currently 40%) is also increasing.

"Stagflation in Europe is a real risk," said Mark Dowding, chief investment officer of RBC BlueBay Asset Management. "Growth is disappointing, but progress in reducing core inflation is limited." The sentiment of the EUR has been deteriorating all summer, and it has been declining for eight consecutive weeks, falling by more than 4% from the peak in July. Hedge funds sold nearly 90% of their net long positions in EUR in August.

Technical Analysis

The EURUSD resumed its downward trend after testing the range high of 1.0770 on Tuesday, but as our headline reads "Potential positive tone still exists for the EUR, but spot prices need to hold the 1.0700 area to extend the chances of improvement in the near term.

Admittedly, according to our model, the bulls will (probably) complete the test of the downside pressure line if they can hold the threshold of 1.0700; if they fail to do so, then the supply zone at the 1.0792 level will be a potential test target for the bulls' mean reversion. After waiting for the target to complete the test, the market will continue to turn downward.

However, if the EURUSD fails to complete the test of our above-mentioned objectives, it directly falls below the threshold of 1.0700 and falls below the recent low of 1.0686, which means that the average will fail. The bulls will continue to fall back in a way that does not retreat. Therefore, it is recommended to set the foundation. After all, the market will be very volatile this week.

Overall, while we are optimistic about the short-term bullish tone, the main tone of the market is to the downside, and it is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 1.0780

Target price: 1.0600

Stop loss: 1.0850

Deadline: 2023-09-26 23:55:00

Support: 1.0700, 1.0686, 1.0635

Resistance: 1.0767, 1.0792, 1.0808