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We are bearish on EUR/USD and while its seen a big decline we think there is more downside to come – the logic of our view in the article below with a round-up of the fundamentals, sentiment, and key technical levels to look out for...


In terms of speculative positioning in the euro speculators still hold a major long position in the euro and we expect them to exit on stop and eventually move to a short position:

cotbase euro futures cot net positions 1

Why are speculators so bullish on the euro? They think not only could the ECB raise rates further but also think the economy can avoid a long and deep recession but we dont expect any more hikes and see a recession as guaranteed:


For the ECB, high inflation keeps the door open for another hike but we believe that the ECB is probably going to hold rates and take a wait-and-see approach. Euro-area flash inflation data last week came in at 5.3% y/y in August, unchanged from July. While core inflation edged lower, core services price inflation is proving more stubborn than the ECB would like but this won't be enough for them to raise rates in our view. Also we can see on the chart below we are heading for deflation.


There is enough evidence that inflation to soften going forward to keep the ECB on hold - In our last article we noted the views of TS Lombard's Oneglia said: “Flash EA PMIs and German PPI continue to signal stagnation and disinflation ahead Job markets remain resilient, but leading indicators of new hiring and wages soften Bottom line: hiking cycle is over.



The ECB will be worried that the latest PMIs show a weakening situation for the service sector while manufacturing is in decline... 

“The decline in eurozone business activity accelerated faster than initially thought last month as the bloc's dominant services industry fell into contraction, according to a survey which suggests the bloc could drop into recession. HCOB's final Composite Purchasing Managers' Index (PMI), compiled by S&P Global and seen as a good barometer of overall economic health, dropped to 46.7 in August from July's 48.6, a low not seen since November 2020.” (REUTERS)

The economy is slowing up so will the ECB raise interest rates at their upcoming meeting? ECB's Chief Economist, Philip Lane, acknowledged that the inflation of goods and services has moderated, and he anticipates a slowdown in core inflation in the coming months. If we look at economic data we can see why the ECB will be reluctant to raise rates leading indicators are falling, economic activity is collapsing and so to is money supply some charts below: 



EU capacity utilization is below median levels, while the US remains above the median...


Activity indicator shows on Spain above zero


The money supply has collapsed due to high interest rates. If we look at PMIs we can see they are likely to follow the money supply lower and we get a recession..


Another chart zone shows the fall in private-sector borrowing.


Finally the global economy is slowing and one of the EU's biggest export markets is China which is moving into recession and another big export market Russia is no longer open - the global economy is slowing and the US is much less reliant on exports than the EU: 



"The monetary policy account from the ECB’s July meeting did not offer much guidance on what the ECB would do at its September meeting. The activity data since the July meeting has been weak, while inflation has proved to be sticky. In fact, stagflation risks were mentioned twice in the account.” (Nordea)

In Conclusion 

The US has a better economy than the eurozone, and rate differentials favor the USD now and going forward, which will see the USD uptrend continue with pullbacks being buying opportunities.

Technical Analysis

Our view of the key levels of support and resistance to look out for are on the chart below.


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