EUR/USD, EUR/GBP Await ECB. Breakout or Breakdown Ahead?

EUR/USD AND EUR/GBP OUTLOOK

The European Central Bank’s monetary policy decision will take center stage next week, particularly as the Federal Reserve enters its blackout period on Saturday in preparation for its November 1 announcement. With a major risk event looming on the calendar, the EUR/USD and EUR/GBP may see heightened volatility in the coming trading sessions as traders recalibrate expectations.

Focusing on the ECB, the institution is seen holding borrowing costs steady after having already delivered 450 basis points of hikes over the course of the 10 previous meetings. This move would not be surprising, as policymakers have shown a willingness to hit the brakes. The recent rise in bond yields in the region has also reinforced the transmission of the bank’s hiking cycle, diminishing the need for further action at this time.

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HOW WILL A PAUSE IMPACT EUR/USD AND EUR/GBP?

To gauge the potential impact of a pause on EUR/USD and EUG/GBP, traders should pay close attention to forward guidance, with special emphasis on President Christine Lagarde’s messaging. That said, if Lagarde signals that this isn’t just a short hiatus for better data assessment, but rather the conclusion of the aggressive tightening campaign, the euro could suffer meaningful losses against the U.S. dollar and a more moderate decline against the British pound.

Conversely, if the guidance leaves the door open for another rate hike at a later date (perhaps December), EUR/USD may have a good opportunity for a measured recovery in the near term, with potential positive effects extending to EUR/GBP but to a lesser degree. This entire scenario carries a high probability of occurrence, so it shouldn’t be dismissed out of hand.

While the Eurozone’s growth profile may appear to warrant a more dovish monetary policy outlook, the inflation dynamics present a different picture. With oil prices (Brent) on a bullish tear and hovering well above the ECB’s September staff projections assumption of $82.00/barrel, CPI may not converge to the 2.0% target until 2026, a year later than the bank’s original projection. This situation may require a more hawkish stance and a resolute commitment not to let up the fight against inflation prematurely.

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EUR/USD TECHNICAL ANALYSIS

EUR/USD seems poised for an outsize move in the coming days given its current position: it is compressed between channel resistance at 1.0600 and trendline support at 1.0525. Traders should watch how price action unfolds in the coming week, keeping in mind two possible scenarios: a break of resistance or a breach of support.

Scenario 1: Bullish breakout

If EUR/USD takes out overhead resistance, which extends from 1.0600 to 1.0625, the upward impetus could accelerate, setting the stage for a rally towards the 50-day simple moving average, followed by 1.0765, the 38.2% Fibonacci retracement of the July/October slump.

Scenario 2: Bearish breakdown

If EUR/USD reverses lower and breaches support at 1.0525, sellers could regain control of the market and trigger a pullback toward the 2023 lows. This area could provide stability and alleviate selling pressure, but if the floor gives way, the pair could head towards 1.0350.

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EUR/USD TECHNICAL CHART

EUR/USD Chart Created Using TradingView

EUR/GBP TECHNICAL ANALYSIS

EUR/USD accelerated higher this month, blasting past major technical ceilings including the 38.2% Fib retracement of the 2023 selloff, the 200-day simple moving average and key swing highs from July and September. If recent gains are sustained, bulls could muster the force to drive prices above resistance at 0.8735. On further strength, the focus shifts to 0.8792, the 61.8% Fib retracement of the move discussed previously.

In the event of a setback, support stretches from 0.8710 to 0.8695. While it’s plausible for the exchange rate to find a foothold within this range during a pullback, a breakdown could reignite bearish momentum, paving the way for a drop towards 0.8675. Below this technical threshold, attention will be drawn to trendline support positioned around 0.8635.

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EUR/GBP TECHNICAL CHART

EUR/GBP Char Creating Using TradingView