Euro Rate Talking Points

EURUSD extends the decline from the previous week as the Bundesbank warns of an economic “slump,” and the weakening outlook for the Euro area may continue to drag on the exchange rate as it puts pressure on the European Central Bank (ECB) to support the monetary union.

EURUSD Rate Eyes Monthly-Low as Germany Warns of Economic Slump

EURUSD approaches the monthly-low (1.1027) as Germany’s central bank warns “economic activity could decline slightly again in the current quarter,” and signs of a looming recession may push the ECB to implement more non-standard measures as the central bank struggles to achieve its one and only mandate for price stability.

It seems as though the ECB will continue to push monetary policy into unchartered territory even though the central bank prepares to launch another round of Targeted Long-Term Refinance Operations (TLTRO) in Septemberas Governing Council member Madis Muller insists that the weakening outlook “may mean that the central bank will have to add stimulus.”

In turn, a growing number of Governing Council officials may show a greater willingness implement a negative interest rate policy (NIRP) for the Main Refinance Rate, its flagship benchmark for borrowing costs, and the account of the ECB’s July meeting may ultimately prepare European households and businesses for a more accommodative stance as the central bank “stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

However, it remains to be seen if the Governing Council will make a major announcement at the next meeting on September 12 as President Mario Draghi steps down at the end of October.

With that said, the monthly opening range sits on the radar for EURUSD, with recent price action raising the risk for a run at the August-low (1.1027) as the exchange rate searches for support.

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EUR/USD Rate Daily Chart

Source: Trading View

The broader outlook for EURUSD is clouded with mixed signals as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with the 1.1100 (78.6% expansion) handle no longer offering support.

The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator fails to retain the upward trend from earlier this year, with the oscillator now tracking a bearish formation.

As a result, the rebound from the monthly-low (1.1027) may continue to unravel amid the string of failed attempts to close above the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) .

Need a break/close below 1.1040 (61.8% expansion) to open up the downside targets, with the next area of interest coming in around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).

For more in-depth analysis, check out the 3Q 2019 Forecast for Euro

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.