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We have been heavily bearish in terms of EUR/USD for the last two months and while it's seen a big fall we think there is far more downside to come. We have the ECB on Thursday and view any rallies as selling opportunities.

In terms of interest rates the USD holds an advantage now in terms of yield and we expect this to continue moving forward and dont expect the ECB to hike rates this week – we think the tightening cycle is over...

ECB Interest Rates

Many market participants expect the ECB to raise key rates further at its meeting next week. This is not our forecast. In view of the weak economy and the downward trend in the inflation rate, a majority of the ECB council members will probably vote for unchanged key rates.” (COMMERZBANK)

Let's see if the ECB raises rates at the upcoming meeting, we doubt it. They failed to raise rates at their last meeting when inflation was higher and PMI's stronger so why do it now rather than last month? We dont think they will raise rates August PMIs painted a dire picture following the also weak July print. Service PMI dropped to a 30-month low of 48.3, entering contractionary territory, while the manufacturing sector continued to see declining activity which supports the view that the ECB could hold rates...


All PMI data is now in contraction...


In terms of inflation, this will ease and this will lead to deflation stagflation and then recession - chart below on Germany which leads the zone where Germany goes the zone follows.



In terms of the euro, this view seems odd to me: “Germany is set for a prolonged recession this year — the only major European economy to experience an economic contraction during 2023, according to fresh forecasts by the European Commission, the executive arm of the EU.” (CNBC) Germany is the powerhouse of the zone but nearly all EU nations will enter recession which is clear from the data.

Euro zone is heading for recession "Euro area growth has weakened notably further during the summer.....the notable cooling in the services dataflow points to weak growth momentum ahead....Our Current Activity Indicator—CAI, which includes both survey and hard data—fell to an annualised pace of -1.4% in August, the lowest level since November 2020." (GS)


ECB Possible Outcomes

Below are the views of ING and we would go with their moderately dovish view but would have far lower targets which you can see on our chart of EUR/USD at the end of this article.



Despite the big fall in the euro speculators still hold an elevated long position which we expect to get taken out on stop and also, we expect speculators to eventually flip short.



We expect a hold from the ECB and with speculators long and bullish we expect more downside with any rallies being selling opportunities...

On the USD Side: We have higher rates a more robust economy and also the USD is a safe haven which points to more strength ahead. We do have US CPI tomorrow and expect it to remain firm if the USD did sell off on relief it came in as expected we would expect it to regain traction to the upside.

Technical Analysis

Our view of the key technical levels of support and resistance to look out for below.




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