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31.10.202300:02 Forex Analysis & Reviews: The euro has reached its boiling point

Everything has its limits. There's a certain boiling point after which everything changes. Bad news can become good news for a currency. I'm not sure if the euro has reached its boiling point, but weak data on German GDP and the eurozone economic confidence indicator pushed EUR/USD to rise above 1.06. And yet, the 7% rally in gas prices amid the escalation of the geopolitical crisis in the Middle East could have scared the bulls. But it didn't.

Since the start of the armed conflict in Israel, the price of natural gas has surged by 30%. Despite the absence of a large-scale invasion in the enclave, the situation is tense. Furthermore, Egypt's announcement of zero gas imports, which would then be re-exported to Europe, theoretically should have hit EUR/USD. We all remember how severe the energy crisis was for the eurozone's economy in 2022. A repeat of that would be a heavy burden on the euro.

Today, the currency bloc is barely standing on its feet even without soaring gas prices. Germany's GDP shrank by 0.1% in the third quarter, and the economic confidence index in the currency bloc has been declining for the sixth consecutive month. What more reason do you need to sell EUR/USD? Fortunately for the bulls, Bloomberg experts had forecasted a deeper decline for both the first and second indicators. As a result, stronger data made it possible for the euro to launch a counterattack against the US dollar.

Dynamics of the German economy

Bloomberg released an optimistic statement, claiming they see the first signs of economic activity stabilization. Meanwhile, European Central Bank officials tried to disprove the market's pessimistic predictions about rates. Gediminas Simkus, the head of the Bank of Lithuania, said he would be surprised if borrowing costs declined in the first half of 2024. His colleague from Slovakia, Peter Kazimir, said bets on a rate cut in the first six months of 2024 were "entirely misplaced". The ECB must first prepare forecasts for December and March and only then confirm that the monetary tightening cycle is complete.

The hawkish speeches of the ECB officials fueled the pair's corrective move. In my opinion, this is due to the closure of speculative shorts ahead of important events such as the announcement from the Treasury about the scale of bond issuance in the fourth quarter, the FOMC meeting, and the US labor market report for October.

Dynamics of the European Economic Confidence Index

Despite the fact that primary dealers expect an increase in the volume of debt offerings in the primary market, the rally in bond yields is no longer helping the EUR/USD bears. It's unlikely that the Federal Reserve will turn hawkish at its meeting on October 31 and November 1. Simultaneously, disappointing U.S. employment data could turn out to be an unpleasant surprise for the dollar.

Technically, on the daily EUR/USD chart, if quotes break out of the fair value range of 1.051-1.061, the pair may continue to rally towards 1.0645, 1.069, and 1.0715. However, the bears may step in there. Sell the pair on rallies.

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Marek Petkovich,
Analytical expert of InstaSpot
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