EUR/USD forecast: Sentiment deteriorates amid turmoil in bond and oil markets

The dollar’s recent rebound as a result of rising bond yields and energy prices has been a key theme in the markets, which is helping to drive major FX pairs, gold, silver and copper all lower, while also weighing on stock markets. Among the major FX, the euro has been held back further by continued gains in oil prices while a closely-watched German sentiment survey today also weighed on the single currency. The near-term EUR/USD forecast therefore remains tilted to the downside as things stand and a drop below 1.1500 could be on the cards heading into the FOMC rate decision on Wednesday.

 

What is supporting the dollar?

 

Supporting the dollar is the continued push in higher US Treasury yields as investors position for a potentially more hawkish Federal Reserve this week.

 

Markets have become increasingly confident that the Fed will raise rates by 25 basis points on Wednesday. This is almost a done deal as far as market pricing is concerned. Investors are also attaching a more than 50% probability, according to the CME’s FedWatch tool, to another increase in October.

 

What is more important for the dollar, however, is the reason yields are rising. The latest surge in oil prices is adding to inflation concerns and making the prospect of rapid monetary easing harder to square with the market backdrop. The 10-year Treasury yield has moved above 5% for the first time since 2007, while Brent crude has climbed to around $107 a barrel.

 

These moves have also unnerved equity investors, providing yet another source of support for the dollar.

 

Euro and European stocks hit by oil and data

 

The pressure on European equities is becoming harder to dismiss as a temporary bout of caution. The major indices here have extended their declines today as the latest rise in oil prices collides with a sharp deterioration in the bond-market backdrop.

 

Renewed Houthi attacks on Saudi Arabia have intensified concerns about disruption to Middle Eastern energy supplies.

 

Rising energy prices are never a good thing for countries that rely on energy imports. Basically that’s pretty much all of the eurozone. Here, something like 95% of crude oil needs are provided by foreign suppliers.

 

With concerns about stagflation coming back to the forefront, German Bund yields have climbed to a 15-year high. The message from bond markets is becoming increasingly difficult for equity investors to ignore.

 

Higher yields raise financing costs across the economy, from mortgages to corporate borrowing, while also increasing the return investors can earn without taking equity risk. That puts pressure on valuations at precisely the moment when higher oil prices are threatening to squeeze consumers and businesses.

 

Technical EUR/USD forecast and key levels to watch

 

The EUR/USD has remained undermined after it broke below the lower trendline of its triangle pattern yesterday. In the process, it took out support around the 1.1565 to 1.1580 area. That was a clear bearish development in the EUR/USD forecast from a technical analysis point of view.

 

 

If selling pressure continues, the next bearish objective for the EUR/USD is the 1.1500 handle. Further lower, 1.1405 would become the next potential target, and area that was the base of the prior breakout. Below that level, we have the June low at 1.1325 next.

 

On the upside, old support between 1.1565 and 1.1580 is now the initial and key area of resistance to watch this week. Above that 1.1635 is clearly another key resistance level. Bullish if we break above that level.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R