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A "Novel" Shift Caused the Euro's Near-term Rally -- But Not the One You May Think

The ECB adopts a hawkish tone... after the EURUSD's uptrend was already underway

by Nico Isaac
Updated: September 03, 2021

On September 3, the world's most popular currency pair, the Euro/US Dollar, took center stage. That day, the euro soared to its highest level against the greenback in one month.

Before you could blink, mainstream experts identified the main cause for the EURUSD rally: News stories on September 1st and 2nd confirmed that Eurozone inflation just reached 3%, a decade peak. In turn this prompted certain high-ranking members of the European Central Bank to suggest the dovish policies of bond-buying and indefinite stimulus may be migrating south for the winter.

And in its place, a certain bird with sharp claws and thirst for rate-rising blood will return. Here, these September 1-2 headlines go on hawk-watch:

  • "Euro Stays Strong Ahead of Euro Area Inflation Reports" (Sept. 1 Yahoo Finance)
  • "Inflation Shock & ECB Hawks Keep Euro Near 1-Month High" (Sept. 2 Reuters)
  • "Euro Near 1-month Peak versus the Dollar, Supported by ECB Hawks" (Sept. 2 Nasdaq)

A September 1 FX Street added:

"Eurozone inflation is rising and European Central Bank hawks are taking notice. Higher inflation has reached the old continent and prompted both Klaas Knot and Robert Holzmann of the ECB to suggest the bank should reduce its bond-buying spree.

"A hawkish shift in ECB policy is now in play and that is a novelty."

Again, this "hawkish shift" in ECB's tone came on September 1-2.

Yet -- the EURUSD rally began well before then. To be precise, the pair's recent low was on August 20. In turn, the mainstream effort to pin the rally on the ECB's new hawkish language doesn't add up.

By contrast, one day before the EURUSD's actual low, our August 19 Currency Pro Service posted this intraday update on the pair which alerted traders to the end of the euro's decline and start of a significant rally. There, our analysts presented the following chart and said:

"We are going into the US session presented with an interesting scenario...

"Starting soon from little if any under 1.1666 favor price staging an initial five wave rally sequence to above 1.1804, and likely representing the first leg up of a perceived much larger advance."

European Euro-US Dollar - 6 hour Aug 2021

And this next chart captures the full extent of the move that followed:

European Euro-US Dollar - 4 hour Sep 2021

Currency market trends can change on a dime, yet you don't have to miss the signs of an imminent turn.

Get in front of near- and long-term shifts in the world's leading forex pairs with our trader-focused Currency Pro Service.

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