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EURUSD: buyers fight to defend the 1.16 handle

The EURUSD pair slid by 0.74% to 1.1598 on Wednesday, September 29. The DXY index rose to a new 11-month high (94.44), on the back of heightened expectations of Fed tapering by year-end and a rate hike in 2022. Risk aversion negatively impacted all major currencies.

The key pair dropped to the 1.1600 support level. Notably, 1.16 acts as key support on the daily and monthly TFs. There is a lot of talk about it, since if this level fails to hold, the road down to 1.12 will be open for sellers.

Sterling shed 0.8% against the dollar to 1.3425 amid concerns over the economic impact of gas and fuel shortages.

Todays macro schedule (GMT 3)

  • 10:00 Switzerland: KOF leading economic indicators (September)
  • 10:55 Germany: unemployment change and rate (September)
  • 12:00 Eurozone: unemployment change (August)
  • 15:30 US: GDP (Q2) and initial jobless claims
  • 16:45 US: Chicago PMI (September)
  • 17:00 US: Fed member John Williams speech
  • 18:00 Fed member Raphael Bostic speech

Current outlook

By the time of writing, major currencies were trading in positive territory. The aussie ( 0.38%) and kiwi ( 0.19%) topped the leaderboard. An upward correction in the FX market was attributable to two news items: first, China's Evergrande Group has resumed construction of about 20 residential projects in Guangdong, Bloomberg reported; second, Bruce Richards, co-founder and CEO of Marathon Asset Management, said Thursday that the investment firm purchased Evergrande debt for the first time this week and will continue to do so at the current low prices.

The US House of Representatives voted to suspend the federal debt ceiling through December 16, 2022 and submitted the bill to the Senate. The bill passed 219-212. The Republicans will most likely veto the bill. The US debt currently stands at $28.8 trln. By comparison, GDP totaled $20.9 trln in 2020.

All central banks believe the inflation surge is transient. This was announced at the ECB Forum on Central Banking. The heads of the ECB, BoE, Fed and BoJ made encouraging remarks about their economies, while acknowledging concerns about the pace and challenges of the recovery.

Conversely, investors do not buy into the notion of ‘transitory inflation’. Prices are rising much faster than the 2% that central banks should be targeting, prompting investors to sell bonds.

Technical analysis

The euro retreated by almost 10 pips on Wednesday. Price action has not moved that fast in quite a while. The decline halted at the 135-degree angle of the Gann fan. Monthly and quarterly candlesticks are closing today. The 1.16 level is key support. Below it, the next support is at 1.1230 (monthly TF). The euro has been trending lower since the beginning of September and nothing will likely be decided today.

Major currencies and S&P 500 index futures are trading in positive territory. This is good sign for buyers. But the 10-year UST yield started to rise again over the last hour. Given that price action has rolled back slightly, the risk of sinking to a new low still remains. If the European FX players support the morning rebound, there is a chance for a correction to 1.135/1.1650. In the current environment, the market will be driven by fixed income yields and stock indices.

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