26.10.202317:16 Forex Analysis & Reviews: Euro withstood torture

"Buy the rumor, sell the fact." Over the past three days, EUR/USD quotes have been declining, reflecting expectations of the U.S. economy accelerating more than twice in the third quarter compared to the second and forecasts for the deposit rate to remain at 4%. When the ECB actually paused and the U.S. GDP expanded even more than expected, the dollar retreated. When everyone is selling, there is an excellent opportunity to buy the euro.

In July-September, the U.S. gross domestic product expanded by 4.9%, the fastest pace of growth for the indicator since 2021. Consumer spending also quickly rose by 4% despite the Federal Reserve's aggressive monetary restraint. Americans chose to loosen their purse strings a bit. They took advantage of a strong labor market, slowing inflation, and excess savings to bask the economy in glory.

Dynamics of U.S. GDP and consumer spending

American exceptionalism served the bears on EUR/USD faithfully, but times are changing. Bloomberg experts expect the pace of U.S. GDP growth to slow to 0.7% in the fourth quarter. The divergence in the growth rates of the American and European economies is unlikely to be as significant as it was in July-September. This circumstance could favor the bulls on the main currency pair.

Furthermore, there are no significant differences in the monetary policies of the Fed and the ECB either. Yes, the European Central Bank noted at its October meeting that the current interest rates will bring inflation to the 2% target. This means that the cycle of monetary policy tightening is over. At the same time, ECB President Christine Lagarde and her colleagues are discussing a balance sheet reduction strategy. The portfolio of bonds purchased during the pandemic is valued at €1.7 trillion. It is important not to repeat the mistakes of the Fed.

The Federal Reserve is getting rid of debt obligations worth $720 billion annually. In the end, this has become one of the drivers of the rally in the yield of 10-year Treasury bonds to the 5% mark and has seriously alarmed FOMC officials. To avoid stepping on the same rakes, the ECB must be very cautious. Moreover, there are additional reasons for concern—the yield spread between Italy and Germany exceeds 200 bps, which indicates an elevated political risk.

Dynamics of the yield spread between Italian and German bonds

Thus, many of the bears' arguments on EUR/USD have already been factored into the quotes of the main currency pair. This creates the groundwork for a correction. However, will the euro, with its weak economy behind it, be able to take advantage of the gift from the U.S. dollar? Will new data interfere with this process? We'll live and see.

Technically, the further fate of EUR/USD will depend on the closing of the day. If, as a result, a pin bar forms with a long lower shadow, it is advisable to consider a buying strategy from the 1.057 level. Conversely, the euro's return to the local low at 1.0525 with subsequent updates would be a signal to sell.