Selling EURUSD amid debt market struggles in eurozone

EURUSD is currently trading at around 1.12500, staying close to 1.5-year lows. By the end of September, the euro had lost about 2.5% of its value against the dollar—and that’s not all. The fundamental picture still looks quite pessimistic for the single currency.

Last month, eurozone inflation surged to 3.8%, up from August’s 3.2%. Meanwhile, the core reading rose to 2.5%. Expensive energy is largely to blame. As a result, the European Central Bank (ECB) finds itself in a predicament, as the current environment calls for further rate hikes. Such a hawkish posture tends to worsen economic growth prospects and increase borrowing costs. Therefore, monetary tightening is unlikely to offer the euro much relief.

Government bond yields across Europe keep rising, particularly in nations with heavy liabilities and substantial budget deficits. The surging costs of new borrowing are gradually increasing debt-servicing expenses and heightening concerns over fiscal sustainability. All eyes are now glued to France. But one wrong step with yield increases, and the entire region could be caught in the fallout. So, what should the ECB do? There is no simple answer. The regulator has to find a fragile balance between taming sticky inflation and preventing debt obligations from going significantly higher.

Now, let’s turn to the United States. The country may boast about its macroeconomic stability. Moreover, elevated returns on US Treasuries continue to underpin the dollar. Given the eurozone’s persistent economic struggles, soaring repayment costs, and looming risks of further deterioration in the debt market, the euro’s potential to strengthen appears rather limited. Consequently, we can expect the pair to keep declining, with the next downside target at 1.10000.

The overall recommendation is to sell EURUSD at the current price of 1.12500, aiming for 1.10000 within a month. To control risks in case the market moves against us, place a Stop Loss order at 1.14000.