FX.co ★ The Euro Quickly Loses Its Upward Momentum

The euro reacted poorly to the German report and failed to maintain the initiative it had gained at the start of the week. The morning gap proved too fragile. The pair rose toward 1.1227, then retreated to 1.1215, turned lower, and is now trading around 1.1202.

What did the report show? Germany's Ifo Business Climate Index rose to 90.2 in October, compared with a forecast of 89.8 and a reading of 89.9 the previous month. On the surface, the result was better than expected. The index is based on a survey of around 9,000 German companies that evaluate current business conditions and their business outlook, providing an indication of the health of the eurozone's largest economy. However, the details of the report presented a mixed picture. The assessment of current conditions deteriorated to 88.8, compared with a forecast of 89.4 and September's reading of 89.5, returning to levels last seen in August, when it stood at 88.5. The overall increase was driven by expectations, which rose to 91.6, compared with a forecast of 89.9 and a reading of 90.4 a month earlier.

The logic is straightforward for beginners. The market places greater weight on current conditions than on business expectations, so the weaker assessment of the present situation outweighed the improvement in expectations and disappointed euro buyers. In addition, Germany's composite PMI fell to 52.8 from 53.8 on Friday, while the Bundesbank warned on Wednesday that the economy was stagnating in the third quarter. Until German businesses see an improvement in actual conditions rather than just in their expectations, the euro is likely to struggle to hold its ground against the dollar, especially with the ECB meeting scheduled for October 29.

The US economic calendar is empty in the second half of the day, with no US data releases or scheduled speeches by Fed officials. As a result, the market is left to focus on geopolitics. The main factor for the dollar will be the Middle East, where the US war with Iran continues to put pressure on oil prices and, in turn, support the US currency. This environment is particularly unfavorable for the euro because the eurozone depends on energy imports, and every increase in oil and gas prices weighs on its economy. In the absence of US data, EUR/USD is likely to remain sensitive to oil prices, leaving the euro in a vulnerable position. Minor fluctuations around key levels should therefore not be mistaken for trading signals.

Momentum

For the euro, the key levels are 1.1207 to the upside and 1.1186 to the downside. At 1.1202, the price is five points below the upper level and 16 points above the lower one. Five points is a very small distance, so beginners should exercise particular caution.

Long positions are worth considering only if the price establishes itself firmly above 1.1207 and stays there. In that case, the targets would be 1.1231 and 1.1259. The likelihood of this scenario appears low. The Ifo report left a negative impression, while oil prices are weighing on the euro.

Selling below 1.1186, with targets at 1.1155 and 1.1117, appears to be the more likely scenario. A new rise in oil prices or a concerning headline could be enough to trigger such a move. However, the price is still 16 pips away from that level, and conclusions should be postponed until a break actually occurs.

Mean Reversion

For the euro, the mean-reversion levels are 1.1215 and 1.1195. The upper level is eight points above the breakout-buy level at 1.1207. If the price rises above 1.1207 again, reaches 1.1215, and then quickly falls back below it, selling opportunities may emerge, as the pair has already reversed from that level once today, during the first half of the day. If the price establishes itself above 1.1215, however, that would constitute a breakout, and selling should be avoided.

The lower level at 1.1195 is nine points above the breakout-sell level at 1.1186. Here, the expected scenario is for the price to dip below 1.1195, fail to hold there, and return above the level. This would provide an opportunity to consider long positions, with a stop-loss below the low of the brief move below the level. If the price establishes itself below 1.1195 and moves toward 1.1186, that would signal a downside breakout, and buying should be avoided.