By midday, the euro had still not chosen a direction. It rose to nearly 1.1151 in the morning, then retraced. Closer to noon, sellers managed to push the pair down to a daily low near 1.1126, but they failed to hold it below that level, and the pair recovered to 1.1139. The market appears to be waiting for a clear signal, and the reason is obvious. The ECB meeting takes place today, and traders are reluctant to open large positions before hearing from Christine Lagarde.
The only European economic data released this morning was Italy's unemployment rate. It stood at 6.3% in September, compared with a forecast of 6.2% and a previous reading of 6.2%, making the result slightly worse than expected. The difference was small and had little impact on the pair's movement, but it made buyers more cautious. No other significant eurozone data was released, leaving the euro without any domestic catalysts and dependent on expectations surrounding the central bank.
The current expectations are as follows. The ECB is forecast to pause its rate-cutting cycle and keep the main refinancing rate at 2.65% and the deposit rate at 2.50%. The pause would follow two rate increases: in June, to 2.25%, and in September, to 2.50%. The market expects the next move in December. The pause itself is already priced in and is unlikely to support the euro. The tone of the press conference will therefore be the key factor. Only particularly hawkish comments on inflation, such as hints at more frequent rate increases, could trigger euro buying, while dovish rhetoric would send the pair lower.
The US side also failed to provide the dollar with a clear catalyst yesterday. Kevin Warsh did not answer the question about December, saying only that more data would be needed before the next move. However, he suggested that economic growth in the third quarter could exceed 3%. Today, the market will have an opportunity to test his remarks against the actual figures. The first estimate of US GDP for the third quarter will be released, with a growth forecast at 3.2%, up from 2.2% in the second quarter. This would represent a notable acceleration. GDP measures how quickly the economy is growing, and if the figure exceeds expectations, it would give the dollar a strong argument for extending its gains.
Other reports will be released alongside GDP. The core Personal Consumption Expenditures (PCE) price index for September, an inflation measure closely watched by the Fed, is forecast to rise by 0.3% month over month and 3.1% year over year, following readings of 0.2% and 3.0%, respectively. Consumer spending is expected to increase by 0.6%, after 0.9%, while personal income is forecast to rise by 0.3%, compared with 0.2% previously. Initial jobless claims are expected to reach 199,000, up from 194,000. If GDP exceeds estimates and the price index comes in above expectations, the dollar will likely continue to strengthen. The market is partly prepared for a strong reading, as Warsh has already hinted at one, but a genuine surprise could force traders to reassess their positions. The key driver for the euro today is likely to be Lagarde's comments, while US data should provide the pair with direction in the short term.
Momentum
EUR/USD
The pair is currently trading at 1.1139, just six points above the lower breakout level of 1.1133. The pair has already dipped below this level today, reaching 1.1126, but failed to hold there and moved back above it. The initial move therefore did not confirm a breakout. If the decline resumes, the next targets are 1.1115 and then 1.1082. A genuine downward breakout requires the price to remain below 1.1133. This is more likely if Lagarde adopts a dovish tone or US GDP comes in stronger than expected.
The upward reference level is 1.1158, just 19 points away. A breakout above this level, followed by consolidation, would open the way toward 1.1176 and 1.1195. Such a move would require hawkish ECB rhetoric. At this stage, that scenario appears less likely and should be treated as an alternative.
Mean Reversion
EUR/USD
The upper reference level of 1.1153 is just five points below the breakout point at 1.1158, so particular caution is needed here. Five points can easily fall within normal market noise, making it difficult to distinguish a breakout from a reversal on the first test. If the price reaches 1.1153, moves above 1.1158, and holds firmly above it, this would confirm a breakout, and selling should be avoided. If the price tests the zone, fails to hold above it, and quickly moves back down, this would indicate a reversal. In that case, short positions could be considered, with a stop-loss above the highest point reached during the failed attempt. The morning high, near 1.1151, stalled just below this reference level.
The lower reference level of 1.1120 is 13 pips below the breakout level of 1.1133. It becomes relevant if a downside breakout has already begun, but the price falls too far too quickly and loses momentum. If the pair drops to 1.1120, fails to continue lower, and moves back above it, long positions could be considered, with a stop-loss below the low of the failed move. However, if the price moves through this level without difficulty and remains below it, the reversal scenario is invalidated, leaving 1.1115 as the next downside target. On an ECB decision day, the market reaction to the press conference can carry the price through any of these levels, so it is best to avoid rushing into trades.
