After a recent surge higher EUR/USD has fallen back below the 1.1200 level and we now expect a major selloff to the downside as speculators who are heavily long are taken out on stop.

“In the coming months, it is very likely that the ECB will also reach its peak policy rate, and this is likely to undermine the attraction of the EUR.” (RABOBANK)

The Interest Rate Outlook

The market sees two more rate hikes but leaked media reports from unnamed ECB officials have indicated that after hiking rates one more time the ECB will move to a data-dependent approach.

The USD has the yield advantage now and going forward. Another view on the interest rate outlook which we agree with:

“First, we no longer have a rate cut for the Fed this year and fewer total rate cuts in 2023-2024. This is a positive for the US Dollar. Aggressive rate cuts by the ECB in 2024 will put more downward pressure on the Euro than Fed cuts will on the Dollar. This is because markets have already anticipated large rate cuts by the Fed but not by the ECB. Finally, the speculative positions in the Euro are extremely large." (ABN AMRO) 

Euro zone Economy a Long and Deep Recession Ahead 

The market has priced a dovish Fed in 2024 but not a dovish ECB which we find strange in terms of the economic slow-up in the zone which is more severe than the one in the US. The market is not seeing a long and deep recession in the eurozone but the charts below show a very bearish outlook going forward. Leading economic indicators are all going down and bank lending to businesses and households has collapsed.

Sentiment

The market is very bearish of the USD which we can see on the chart below in terms of the DXY US Dollar Index. The euro is the largest component of the Index and speculators are heavily long. On the COT Net Traders Positions, we also have an elevated long position with an increase in long positions this week while smart money commercials have gone heavily short.

Technical Analysis

In terms of EUR/USD the key levels of support and resistance to watch are on the chart below.