Volatile Pullback Amid US-EU Policy Divergence

Forex

Summary:

EUR/USD is currently hovering near its two-month low, clearly reflecting a significant divergence between the US and Eurozone economies in terms of monetary policy trajectories and economic growth expectations.

BUY EURUSD

EXP

PENDING

1.13800

Entry Price

1.15744

1.13100

1.13979 +0.00189 +0.17%

Pips

PENDING

1.13100

Exit Price

1.13800

Entry Price

1.15744

Fundamentals

The EUR/USD exchange rate is trading around 1.1367, down marginally by 0.11% on the day and remaining near its two-month low. The current price action deeply reflects the marked divergence in monetary policy paths and economic growth outlooks between the two major economies.

From the US perspective, the strong tone remains firmly intact. At its monetary policy meeting on September 16, the Federal Reserve announced a 25-basis-point rate hike, raising the target range for the federal funds rate to 3.75%–4.00%. This marks the first rate hike since July 2023, underscoring its determination to combat inflation. Meanwhile, New York Fed President John Williams and Philadelphia Fed President Patrick Harker (Note: referenced as Paulson in draft) have recently released hawkish signals, noting that the disinflation process remains unsatisfactory and that further rate hikes may be necessary if economic data aligns with expectations. This directly pushed the US Dollar Index (DXY) to a new eight-week high above the 101 mark. Re-acceleration in the US labor market and robust PMI data have further cemented the US dollar's safe-haven and yield advantages.

In contrast, although the European Central Bank (ECB) followed suit on September 10 with a 25-basis-point hike, raising the deposit facility rate to 2.50%, the structural challenges it faces are far more complex. Inflation in the Eurozone remained elevated at 3.3% in August, with energy prices surging 14.3% year-on-year. Geopolitical risks—particularly the energy shocks stemming from the Middle East conflict—have contributed to sticky inflation. Although German factory orders grew above expectations for three consecutive months, signaling a potential manufacturing recovery, a sharp slump in auto exports and sluggish consumer spending (retail sales fell 0.6% in July) reveal the fragility of domestic demand. Market concerns that the ECB is caught in a dilemma between curbing inflation and avoiding stagflation have eroded the euro's appeal.

Technical Analysis

On the daily chart, EUR/USD is currently in a consolidation and bottom-seeking phase following a pullback from high levels. The price shows signs of approaching critical support levels below, with key support at the 38.2% Fibonacci retracement level (around 1.13800) and the 50.0% Fibonacci level (1.11284). A breakdown below this support zone would open the door to a new wave of declines. Key resistance above lies around 1.16400 (23.6% Fibonacci level and the lower bound of the previous high-level range), which serves as the bottom of the long-term consolidation range and a support-turned-resistance zone. EUR/USD has broken below its previous high-level consolidation range; whether it can stabilize near 1.13800 remains to be seen.

Regarding technical indicators:

Ichimoku Kinko Hyo: Both the Kijun-sen (1.153205) and Tenkan-sen (1.149603) are sloping downward, and price action is trading below the Kumo (Cloud), signaling strong bearish momentum. Although the current candlestick at 1.13863 has stabilized near the key support with a small bullish body suggesting potential rebound signs, the strong downtrend and overhead Cloud resistance indicate that EUR/USD may test 1.13800 and lower support levels further before initiating an upward move.

ADX: The ADX line is rising noticeably (reaching 27.82) with the Directional Indicators (+DI and -DI) diverging sharply. +DI remains depressed at 4.09 while -DI sits high at 51.18, confirming that EUR/USD is in a strong downward trend. If +DI turns upward from low levels and -DI retreats in the future, it will signal a potential rebound following a period of bottoming out. Volatile Pullback Amid US-EU Policy Divergence_1

Volatile Pullback Amid US-EU Policy Divergence_1

Trade Recommendations

Trading Direction: Long

Entry: 1.13800

Target: 1.15744

Stop Loss: 1.13100

Support Levels: 1.13863, 1.12771, 1.11284

Resistance Levels: 1.15744, 1.16400, 1.17231

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