EUR/USD had been declining for 25 full days, apart from a few brief pauses. During this period, the euro lost 530 points, and its prolonged decline began more than a month ago as the market prepared for an FOMC rate hike. Only toward the end of last week did the bulls manage to launch a noticeable counterattack. These bullish moves occurred on days when the dollar could easily have continued rising. It is worth recalling that US inflation in September exceeded forecasts, core inflation also came in above market expectations, and the Producer Price Index showed a much sharper acceleration than the market had anticipated. All three inflation indicators are rising more strongly and rapidly than the Federal Reserve expects. The dollar could therefore have risen in line with a straightforward relationship: higher inflation increases the likelihood of tighter Fed policy.
However, over the past two weeks, no FOMC member has expressed support for monetary policy tightening in October. On Friday, Fed President Kevin Warsh delivered a speech but did not forecast or announce further policy tightening either. In other words, Fed policymakers have given the market no indication that higher-than-expected inflation should lead to more hawkish action by the regulator. In my view, the bears have been on the offensive for too long, and the dollar has risen too sharply relative to the amount of rate hikes planned by the Fed. Throughout this period, traders have simply ignored the ECB's and the Bank of England's previous and expected rate hikes.
At present, it cannot be said that the euro's decline has been halted or ended. Imbalance 24 remains valid, and the price could react to it by generating a sell signal. The bears have gone too far, and stopping them now will not be easy. Although the market has consistently ignored the entire body of information supporting the euro for more than a month, this does not mean that the euro will now rise continuously. First, Imbalance 24 needs to be invalidated, and the bulls must form their own bullish patterns. This would require a sharp upward move in the euro, but the bulls continue to demonstrate weakness and a lack of momentum.
In September, the FOMC not only raised interest rates but also signaled its readiness to continue tightening monetary policy. This was enough to trigger a large-scale bearish advance. However, even after the Fed's September tightening and a possible further move in December, it is difficult to argue that the euro has received no positive news during this period.
Overall, the news backdrop continues to favor the bulls, in my view. Although the Fed has adopted a more hawkish monetary policy stance, this is not the only factor determining exchange rates. The European Union also faces problems, but that is precisely the point: problems exist everywhere, yet only the euro is falling. Both central banks are tightening monetary policy, but only the dollar is rising. Geopolitical tensions affect both the United States and the European Union, yet the market sees only the dollar.
The current chart structure clearly indicates that bearish momentum remains intact. The only active pattern at present is Imbalance 24, which could be played out in the near future, as a corrective pullback has begun. The bulls' only current opportunity lies in a liquidity sweep below the 1.1066 low. However, opening long positions requires more than a liquidity sweep alone.
The economic news backdrop on Tuesday was relatively weak and attracted little attention from traders. Economic sentiment indices for Germany and the European Union came in below expectations, while the market largely ignored the US housing construction data. This is nothing new. Over the past couple of months, economic releases have been overshadowed by broader events and trends.
The bulls still have numerous reasons to launch an advance in 2026. Structurally and fundamentally, Trump's policies, which led to a substantial decline in the dollar last year, have not changed. At present, no significant factors supporting the US currency are apparent, despite the FOMC's hawkish stance. Geopolitical developments, which supported demand for the US currency during much of the first half of 2026, are no longer doing so.
The economic calendar for October 21 contains one event that could be of considerable interest. The economic news backdrop may affect market sentiment on Wednesday, particularly during the second half of the day.
In my view, the pair remains in the process of forming a bullish trend that has been interrupted by a year-long corrective pause. The news backdrop shifted sharply in favor of the bears eight months ago, but the trend itself, which has been in place for four years, cannot be considered canceled or complete. The bulls could resume their advance before the end of the year, but their only realistic opportunity at present is the 1.1066 low established in June last year.
The bears have received a new sell signal within Imbalance 19. At present, existing short positions should be kept open. A new sell signal could form within Imbalance 24. Since a further corrective pullback remains possible, it may be advisable to take partial profits on short positions.
*La presente analisi del mercato ha un carattere esclusivamente informativo e non rappresenta una guida per l`effettuazione di una transazione.
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