The Euro and the Pound Have Limited Upward Potential

The first half of the day passed without any new European data releases, making the price action on the charts all the more interesting. The euro and the pound briefly declined but failed to sustain their losses. The euro fell to 1.1193, while the pound reached 1.3306, after which both currencies recovered. The dollar remains strong, and the main reason is not economic data but oil prices and news surrounding Iran.

Let's start with Europe. The war involving Iran has been ongoing since late February, and the market has long been accustomed to assessing any news from the Persian Gulf through the lens of oil prices. Brent is trading around $105 per barrel, and oil prices have risen by approximately 65% since the beginning of the year. This is particularly unfavorable for the euro because the eurozone depends heavily on energy imports. According to the preliminary estimate, energy prices rose by 18.8% year-on-year in September, compared with 14.3% in August. Further increases in oil and gas prices immediately put pressure on business and household expenses. Add political instability in France to the equation, and there are even fewer reasons to buy the euro.

The pound is sensitive to the same factors, although they affect it differently. High fuel costs have triggered the fastest increase in prices in the UK services sector in recent months. This puts the Bank of England in a difficult position. The economy is caught between inflation and growth concerns, and an interest rate of 3.75% cannot respond to every spike in oil prices. This is precisely why the pound cannot be considered a safe haven. It faces essentially the same pressures as the euro, although their impact is somewhat milder.

Now, let's turn to the dollar. The chain of events is straightforward. High oil prices fuel inflation, and the higher inflation rises, the more convinced the market becomes that the Federal Reserve will maintain a restrictive policy and that yields will remain elevated. In addition, the dollar attracts safe-haven demand when the news becomes alarming. As long as tensions remain high in the Middle East, the dollar is likely to maintain its advantage over both the euro and the pound. The euro is likely to suffer more.

Today's US economic calendar includes the NAHB Housing Market Index for October. The index is based on a survey of single-family home builders. They assess current sales conditions, expectations for the next six months, and the number of prospective buyers visiting new homes. For the market, this is an early indicator of housing sector conditions, which are highly sensitive to mortgage rates. This index rarely changes the dollar's direction, and no surprises are expected. Therefore, oil prices and news surrounding Iran will remain the main drivers for EUR/USD and GBP/USD. A sudden headline from the Strait of Hormuz would outweigh any housing data.

For the euro, the breakout levels remain unchanged: 1.1234 on the upside and 1.1193 on the downside. The price at 1.1212 is almost exactly between them, 22 points below the upper level and 19 points above the lower one. Today's low of around 1.1187 briefly dipped below the lower level but then recovered. This is a good example of why the first test of a level should not be treated as a confirmed breakout.

For short positions, the price needs to consolidate below 1.1193 and remain there. In that case, the targets would be 1.1156 and 1.1117, and the backdrop of oil prices and developments around the Strait of Hormuz supports this scenario. I consider buying above 1.1234, with targets at 1.1268 and 1.1310, less likely because this scenario requires a positive catalyst, such as easing tensions surrounding Iran. So far, no such catalyst has emerged.

For the pound, buying above 1.3337 would target 1.3368 and 1.3397, while selling below 1.3307 would target 1.3273 and 1.3233. The price at 1.3330 is close to the upper boundary, just seven points below 1.3337. However, the morning high failed to break through this level, and the pair reversed. Therefore, the upside breakout has not yet been confirmed. The morning low of 1.3306 also reached the lower level and recovered, so no short positions have been triggered either.

The preferred approach is to wait for the price to consolidate beyond either boundary rather than enter a trade on the first test. If the news background remains tense, the downward scenario deserves closer attention, but the levels remain unchanged.

For the euro, the mean-reversion levels have been updated to 1.1227 and 1.1186. Both are very close to the breakout levels. The upper level at 1.1227 is seven points below 1.1234, while the lower level at 1.1186 is seven points below 1.1193. Beginners should be particularly careful here because a single test is not enough to distinguish a reversal from a breakout.

The downward scenario has already played out once this morning. The price fell below 1.1193, reached approximately 1.1187, failed to consolidate there, and recovered. If the same pattern appears around 1.1186, buying positions can be considered, targeting a return to the middle of the range. However, if the price falls below 1.1186 and remains there, this would constitute a breakout, and buying should be avoided. The stop-loss should be placed beyond the low of the brief downward spike. At the upper level of 1.1227, the preferred setup is for the price to test the level and quickly reverse downward, creating a potential selling opportunity.

For the pound, the mean-reversion levels remain unchanged at 1.3345 and 1.3305. The upper level is eight points above the breakout-buy level of 1.3337. If the price rises above 1.3337, reaches 1.3345, and then quickly falls back below it, selling positions can be considered. If the price consolidates above 1.3345, this would constitute a breakout, and selling should be avoided.

The lower level at 1.3305 is only two points below the breakout level of 1.3307. A difference of two points is negligible market noise, so a breakout cannot be distinguished from a reversal based on the first test alone. The morning low of 1.3306 reached this zone and then rebounded.

If the price declines below 1.3305 again, quickly recovers above 1.3307, and holds there, buying positions can be considered, with a stop-loss below the low of the brief downward spike. If the price instead consolidates below 1.3305, the mean-reversion scenario has failed, and the downward breakout becomes the primary scenario.