Should you buy the euro ahead of the ECB meeting?

The common currency has recently been in a bearish trend, falling nearly 5% from its 2023 peak. Weak economic performance in the euro area led hedge funds to dump bets on a rally.

Moreover, the uncertainty surrounding this week’s ECB meeting is huge. Currently, the market participants are divided regarding what the central bank will do on Thursday – raise the key interest rates again or pause? More precisely, there is a 53% hike probability and 48% of a pause. In other words, it is a coin toss.

Despite the bearish price action during the summer, the euro reached an attractive point. In particular, EUR/USD is the perfect candidate for a bounce from a technical and fundamental perspective.

Let’s start with the fundamental picture. For currencies, all that matters are the interest rates. There are good chances that the ECB will hike one more time and the Fed will hold.

Moreover, given the rumors in the market that the Fed might not deliver one more rate hike this year, the euro might extend its rally in anticipation. That is particularly true if the US inflation report due later today confirms the fact that the disinflationary process is still in place.

Given the recent drop, it is very easy to say that the euro has lost momentum. But one fails to mention that the common currency has rallied hard against the US dollar since last October.

Back then, it was trading below 0.96 and it reached 1.12 in nine months. Therefore, we might interpret the recent drop as a natural correction in an otherwise bullish trend.

Here is the bullish trend, reflected on the daily chart above. Believe it or not, the fact that the price action was rejected at the upper edge of the rising channel is a bullish development for the EUR/USD.

It means that an impulsive wave ended there, as such structures must have a channeling component.

It is difficult to buy the euro here because it feels like trying to pick up a falling knife. But one should keep an open mind and interpret the recent drop in light of the previous strong rally.

I’m bullish on the euro here.

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