Weekly Prediction: The Euro/Dollar Exchange Rate Will Not Fall Any Further; Dollar Bulls Have Appeared

The Euro to Dollar exchange rate kept its early week gains, only to crash spectacularly short of parity by the end of the week, closing at around 0.9750 and losing ground on the week.

At the beginning of the fourth quarter, investors were optimistic, with stocks on Wall Street reporting massive gains and government bonds extending their gains from the previous week.

Risk-taking appetite is helping the EUR/USD.

Investors expected central banks to slow the pace of quantitative tightening due to the rising risk of a global recession.

Such expectations and the demand for high-yielding assets were bolstered by the Reserve Bank of Australia's (RBA's) 25-basis-point cash-rate increase, which was less than expected.

Sadly, the positive energy was short-lived. In light of the European Union's (EU) proposal of additional sanctions against Russia for its invasion of Ukraine in February, the value of the common currency has begun to decline since Wednesday.

The illegal annexation of the Ukrainian regions of Donetsk, Luhansk, Kherson, and Zaporizhzhia resulted in the imposition of sanctions, including a cap on the price of Russian oil and limits on goods entering and leaving the country.

There is trouble brewing in Europe's Union.

The risk-taking spirit has been dampened by recent sluggish EU statistics that have revived concerns of an economic downturn in the Union. September PMIs were revised downward by S&P Global, indicating a steeper decline in the business sector.

In the same month that retail sales in the EU fell by 0.3% and sales in Germany fell by 1.3%, wholesale inflation in the EU increased by 43.3% year over year.

Meeting of the Monetary Policy Committee of the European Central Bank The value of the currency as a whole was affected by accounts, too. The memo claims that some government employees wanted a rate hike of 50 basis points rather than the current 25.

In addition, the median inflation forecast for the next three years has not changed from the previous projection of 3%. Even though policymakers acknowledged that a euro devaluation could exacerbate inflationary pressures, they argued that taking "decisive" action now would prevent the need for a more forceful rate increase later.

Members of the US Federal Reserve are more hawkish than they have ever been before.

Since US Federal Reserve speakers were hitting the wires, echoing their well-known hawkish tone, the market sentiment deteriorated further.

President of the Minneapolis Fed Neel Kashkari said more work needs to be done on inflation, and that while there is a danger of overshooting, there is essentially no indication that inflation has peaked.

Charles L. Evans, president of the Federal Reserve Bank of Chicago, and Loretta Mester, president of the Federal Reserve Bank of Cleveland, have both said that controlling inflation is a top priority.

To sum up, Governor Christopher Waller has said he sees no reason for the Fed to slow down on its policy tightening. Meanwhile, domestic data in the US has bolstered hopes that the Fed will maintain its aggressive monetary tightening.

The September Nonfarm Payrolls report showed that the economy added 265,000 jobs, which was higher than expected but still lower than August's gain of 304,000.

While the drop in unemployment to 3.5% was more dramatic than expected, the drop in labor force participation to 62.3% from 62.4% in August was less dramatic than expected. This news came after a series of disappointing reports on the US labor market.

On Tuesday, the market received news that layoffs and discharges continued to exceed 1.5 million while the number of job openings dropped dramatically in August.

In addition, the Challenger Job Cuts report published on Thursday indicated that in September, US-based firms reported 29,989 layoffs, which was an increase of 46.4% month-over-month and 67.7% year-over-year.

Last but not least, initial claims for unemployment benefits increased to 219K in the week ending September 30, far exceeding analysts' expectations of 200K. In spite of contradictory reports, the labor market appears strong enough to withstand forthcoming rate hikes. Inflation is the key factor.

There will be fewer, but more riveting, happenings in the following week. Federal Reserve Minutes from the most recent meeting will be released on Wednesday, and the September Consumer Price Index will be released on Thursday by the federal government.

This year's predicted annual inflation rate of 8.1% is up from last year's 8.3%. The consensus forecast for the core rate is 6.5%. If the Consumer Price Index drops in August, it probably won't make much of a difference in terms of market expectations for the Fed's next move.

It is expected that Germany's Harmonized Consumer Price Index, which measures inflation, will remain unchanged at 10.9% when it is released in September. Friday, September US Retail Sales will be the focal point of attention.

Technical Forecast for the Euro/Dollar Exchange Rate

As the week came to a close, the EUR/USD traded below the 38.2% Fibonacci retracement of the 1.0197/0.0535 drop at 0.9790, suggesting that the corrective rise may have peaked.

The pair may return to test the bottom of the range in the coming days, with a possible break lower.

As can be seen in the weekly chart, the pair failed just before the daily falling trend line from the yearly high at 1.1494, confirming the continuation of the bearish trend.

The 20 SMA continues to be significantly lower than the longer time frames and far higher than the trend line. While this is going on, technical indicators remain weak and oversold.

Every day, the odds are stacked against you. All of the moving averages for this pair are sloping down, and current trading is below them. Meanwhile, technical indicators have failed to cross below their midpoints and have continued falling.

Immediate support can be found near the 23.6% retracement level of the aforementioned daily decline, which is currently at about 0.9690. Prior to the multi-year low of 0.9535, watch for movement near the 0.9600 level.

Potential buyers will hold off until the price is somewhere between 0.9870 and 0.9945. And even if it does manage to climb back above that level, it will still need to break through the trend line around 1.0050 or risk falling further.

Opinion Poll on the Euro/Dollar

FXStreet's forecast poll suggests the Euro/Dollar exchange rate will remain under selling pressure over the coming weeks. When looking at all time periods, bears come out on top. The pair is forecast to stay close to the 0.97 area until the end of the year.

The Overview chart paints a dismal picture of the Euro. Repeated drops across all three moving averages have brought us to new yearly lows.

What's more, a rising proportion of market participants now anticipate lower lows for the year below 0.9500, with probable falls below 0.9000, as shown by monthly and quarterly perspectives.