The EURUSD currency pair resumed its decline this week and approached the level of 1.1 for the first time since mid-August. At the beginning of Wednesday's trading session, the bulls are trying to regain some of their lost positions, but there is little chance of returning to the yearly highs. Ahead of the key events of the next few days, both the dollar and the euro are at risk of weakening. However, the likelihood of a decline in rates is more significant for the European currency.
The next ECB meeting will be held tomorrow, at which interest rates will surely be cut by 0.25%. At the same time, Bloomberg analysts consider such a step insufficient to boost the European economy. Monetary policy easing in June, along with summer sporting events, did not lead to an increase in household spending. Without improvements in consumer sentiment, EU GDP growth may fail to meet the ECB's forecast of 0.9%.
Inflation dynamics also speaks in favor of a more aggressive cut in interest rates in Europe. For example, in Germany the price growth rate in August slowed down just to the regulator’s target of 2%. If the economy keeps weakening, there is a risk of inflation falling even lower, which is what European officials have been fighting against for the past decade. Under such conditions, the ECB's monetary policy is predetermined for further easing.
Considering these factors, Morgan Stanley analysts have revised their EURUSD forecast. According to their updated assessment, the euro/dollar ratio will fall to 1.02 by the end of this year. Moreover, the bank's experts do not exclude the parity of this currency pair. David Adams, Chief Currency Strategist at Morgan Stanley, believes that the upcoming ECB meeting will force traders to reconsider their overly optimistic expectations for the euro. According to him, market participants are underestimating the potential for rate cuts in Europe which far exceeds the US Fed's capacity.
The RSI continues to decline on the daily chart of EURUSD with no signs of reversal. The oversold zone is still quite far, and the rates have enough time to reach the level of 1.095.
Consider the following trading strategy:
Sell EURUSD at the current price. Take profit – 1.095. Stop loss – 1.112.
This content is for informational purposes only and is not intended to be investing advice.
