The euro's trend lower is showing signs of exhaustion and a reassessment of technical and fundamental factors may lead to a significant rebound for the single currency.
The factors weighing on the EUR/USD over the past four months included safe-haven dollar flows as global equities wobbled, relatively hawkish Federal Reserve expectations and the likelihood of a large U.S. fiscal stimulus package passing Congress to boost U.S.
The EUR/USD rose 0.55% on Wednesday despite hotter-than-expected U.S. CPI data nL1N2R914S and Fed minutes all but confirming tapering will commence as early as November nL1N2R91NQ.
The hawkish Fed expectations were so baked into the EUR/USD price, it ended up being a 'sell the rumour, buy the fact' event.
The lack of resolution on the debt ceiling damages the U.S. dollar's safe-haven status, while also suggesting there is little chance of a bipartisan agreement for President Joe Biden's $3.5 trillion infrastructure package nL8N2R42M1.
If the Democrats are forced to pass a reconciliation bill to raise the debt ceiling in December, they won't be able to use that process to force through a stimulus package in the same fiscal year.
EUR/USD closed above the 10-day moving average (1.1577) on Wednesday, for the first time since Sept 9, which warns momentum is shifting to the upside.
Key resistance is at 1.1640 where the 21 DMA and last week's high converge.
A weekly close above 1.1640 would complete a bullish outside week after the pair hit a three-month low.
A subsequent break above the 38.2 Fibonacci retracement of the 1.1909-1.1522 drop at 1.1669 would confirm a bottom is in place.
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