13.10.202312:00 Forex Analysis & Reviews: Overview of the EUR/USD pair. October 13th. The FOMC minutes did not provide a clear answer regarding the interest rate in November

The EUR/USD currency pair sharply plummeted on Thursday. This move was, of course, solely triggered by the U.S. inflation report, which we will discuss shortly. However, it should be noted that, in essence, there were no reasons or grounds for the market to react so strongly to this. Nonetheless, we witnessed a significant drop in the pair and its consolidation below the moving average line. Now, the further corrective movement is once again in question, and the recent upward correction of the past days and weeks appears quite weak. We believe that another leg of the upward correction is possible, as after a drop of 800 points, there should be an upward movement of at least 200–300 points.

As for the longer-term prospects of the European currency, we still expect it to continue declining. We wouldn't mind if it resumed today because the euro still looks relatively expensive compared to the dollar. Remember that there are key macroeconomic indicators that should be taken into account in the background. The U.S. economy is much stronger than the EU's economy (as evidenced by the GDP reports). The Federal Reserve's interest rate is much higher than the ECB's interest rate. Inflation in the U.S. is lower than inflation in the EU. We believe that these three facts are sufficient for the euro to fall to $1.02-$1.00.

Once this happens, the market will be looking for a new fundamental basis from which to operate for the next 3–6 months. It could be the upcoming easing of monetary policy in the U.S. (although when it will begin, no one knows yet). It could be a new geopolitical conflict in the Middle East, a rise in energy prices, or a new surge in inflation. This would force central banks to react, leading to a new fundamental basis.

The FOMC minutes have only further confused rather than clarified matters. As we warned, the FOMC minutes are a mere formality, containing very rarely important information. For example, what did we learn from the September minutes? "Some of the monetary committee members consider further rate hikes to be unwise." "The majority of policymakers believe it is necessary to raise rates by the end of 2023." "Some officials believe it is time to adopt a 'keep rates low for an extended period' approach." What conclusions can the market draw from this data?

At the same time, according to the FedWatch tool, the probability of tightening monetary policy on November 1st is 10%. Several Federal Reserve officials have already stated this week that they oppose a rate hike. Some have argued that the sharp rise in U.S. bond yields should help curb inflation, so there is no need for an additional rate increase. Moreover, at the last meeting, the rate was not increased, and the Fed switched to raising it once every two meetings this summer. Thus, three weeks before the next FOMC meeting, it is entirely unclear what decision to expect from the U.S. regulator.

However, there is some good news. The Fed's decision in November does not have much significance for the U.S. dollar. Recall that the U.S. dollar steadily declined almost the entire time the Fed raised rates. Now it's "time to level the playing field," so the dollar can strengthen regardless of fundamentals and macroeconomics. Yesterday showed us that strong factors supporting the dollar are not needed in the market. It is ready to continue buying. We are not sure about the end of the upward correction; now we will need to rely on the Heiken Ashi indicator. For example, if it turns upward today, it may indicate a resumption of the upward correction. Otherwise, we will likely see a resumption of the downward trend.

The average volatility of the euro/dollar currency pair over the past 5 trading days, as of October 13th, is 81 points and is characterized as "average." Therefore, we expect the pair to move between the levels of 1.0470 and 1.0632 on Friday. A reversal of the Heiken Ashi indicator upwards will indicate a possible resumption of the upward movement.

Nearest support levels:

S1 – 1.0498

S2 – 1.0376

S3 – 1.0254

Nearest resistance levels:

R1 – 1.0620

R2 – 1.0742

R3 – 1.0864

Trading recommendations:

The EUR/USD pair has settled below the moving average. Therefore, new short positions can now be considered with targets at 1.0498 and 1.0470 until the Heiken Ashi indicator reverses upwards. Long positions can be considered with a new price confirmation above the moving average line with targets at 1.0620 and 1.0742, but we still do not expect a significant rise in the euro.

Explanations for the illustrations:

Linear regression channels - help determine the current trend. If both are pointing in the same direction, it means the trend is currently strong.

Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction for trading.

Murrey levels - target levels for movements and corrections.

Volatility levels (red lines) - the probable price channel in which the pair will trade in the next day based on current volatility indicators.

CCI indicator - its entry into the oversold area (below -250) or overbought area (above +250) indicates an approaching trend reversal in the opposite direction.