EUR/USD Technical: Overstretched Decline Heading into ECB Meeting

• A 25bps cut by the ECB is likely to have been fully priced in.
• The current high expectation of another ECB rate cut in December faces an increased repricing risk.
• Watch the 1.0780/0750 key medium-term support on the EUR/USD.

In the past four weeks, the EUR/USD has plummeted by 3.3% from its 25 September high of 1.1214 to today’s current intraday low of 1.0849 at this time of the writing ahead of the European Central Bank (ECB) monetary policy decision.

Based on a one-month rolling performance basis, the Euro is the second weakest major currency against the US dollar with a loss of 2.5%, above the Japanese yen which was the weakest major currency as it shed -6.4% against the US dollar.

25 bps cut is likely to have been fully priced in

The current price movement of the EUR/USD is likely to have fully priced in today’s 25 basis points (bps) cut by the ECB, its third cut in 2024 to bring the key deposit rate to 3.25% as headline inflation in the Eurozone decelerated to 1.7% y/y in September, below ECB’s target of 2% for the first time in more than three years.

In addition, lacklustre readings seen in September’s manufacturing and services PMIs data suggest increasing signs of a weakening economic condition in the Eurozone.

Hence, market participants are looking at one more rate cut of 25 bps by the ECB in December before 2024 ends.

Oversold and overstretched

Fig 1: Major & medium-term trends of EUR/USD as of 17 Oct 2024 (Source: TradingView)

After taking into consideration the heightened dovish expectations being played out now in terms of the swift downward movement of the EUR/USD seen in the current week, there is an increasing risk of a repricing of the next ECB rate cut expectations (lowering the odds of cuts) if ECB President Lagarde offered less dovish guidance during her press conference later.

Through the lens of technical analysis, the 4-week decline seen in the EUR/USD has led the daily RSI momentum indicator to reach its oversold region for the first time since 15 April 2024.

Current price action is also coming close to the major “Symmetrical Triangle” range support at 1.0780/0750 (see Fig 1).

In addition, the daily Bollinger Bandwidth indicator has risen sharply since 1 October 2024 which suggests an overstretched decline condition at this juncture that increases the odds of at least a short-term mean reversion rebound scenario.

If the 1.0780/0750 key medium-term pivotal support holds on the EUR/USD, it may shape a mean reversion rebound towards the 1.0950 intermediate resistance in the first step.

However, a breakdown and a daily close below 1.0750 see the continuation of the impulsive down move sequence to expose the next medium-term support at 1.0620.