For Euro Traders, October is Going to be a Crazy Ride

September’s price action in the EUR/USD strongly suggests that investors should prepare for a volatile month. The combination of technical and fundamental factors should set a wicked tone in the market during October.

Trading the long side in July and August seemed easy for the bullish traders when the Fed was talking down a third Fed rate hike before the end of the year and U.S. Treasury yields were falling. A misinterpretation of comments from European Central Bank President Mario Draghi also fueled the speculative spirit.

However, the robust trading action came to a screeching halt on September 7 when the European Central Bank (ECB) held interest rates at 0.00 percent and said it stands poised to increase its asset purchase program if needed, quashing any remaining expectations that it would signal a stimulus wind-down.

President Mario Draghi said low inflation rates meant that a “substantial degree” of monetary policy remains necessary until the end of the year at least. But he added that the central bank would decide in the fall – at its October meeting – on the status of its bond-buying program for next year.

“The Governing Council confirms that the net asset purchases, at the current monthly pace of 60 million Euro, are intended to run until the end of December 2017 or beyond, if necessary,” Draghi told a press conference.

“This autumn, we will decide on the calibration of our policy instruments beyond the end of the year,” Draghi noted.

Well, October is here and investors are now eagerly looking forward to the ECB’s October rate meeting on October 26.

However, EUR/USD traders now face a major challenge from the Fed if you trust the price action on the charts because, on September 20, the Fed left open the door for a third rate hike by the end of the year. Last week, Fed Chair Janet Yellen even reiterated the need for another rate hike.

The EUR/USD formed a top on September 7 with the ECB decision and Draghi’s comments. Another top was formed on September 20 with the Fed’s monetary policy statement and last week, the Forex pair sold off on a combination of uncertainty caused by the German elections and Yellen’s hawkish remarks.

Cleary, Euro traders are being affected by the Fed’s surprise change in sentiment and this may be something they weren’t counting on when they were driving the single-currency higher. I also seem to remember some investors saying the dollar would never recover because the ECB was taking over leadership from the Fed. Last month’s price action suggests otherwise.

Monthly Technical Analysis

Last month, the EUR/USD topped at 1.2092, just shy of a major long-term 50% level at 1.2166. The subsequent sell-off formed a potentially bearish closing price reversal on the monthly chart.

The chart pattern lays the groundwork for this month’s price action.

Taking out 1.2092 will negate the closing price reversal chart pattern and signal a resumption of the uptrend. This could create enough upside momentum to fuel an even further rally into 1.2166 to 1.2597.

On the downside, taking out 1.1716 will confirm the closing price reversal top and signal that the selling is greater than the buying at current price levels.

The short-term range is 1.0339 to 1.2092. If a sell-off gains traction on the move through 1.1716 then we could see an eventual break into its retracement zone at 1.1216 to 1.1009.

Forecast

With the chances of a Fed rate hike currently at 71 percent, this number is likely to increase if the economic data continues to support the Fed’s next move. Especially important will be the data read on labor and inflation.

If the ECB and Draghi continue to leave room for even more stimulus until the end of the year when coupled with the strong chance of a Fed rate hike, the EUR/USD could sell off sharply.

If the U.S. economic data and the Draghi create more uncertainty then look for volatility and a two-sided trade. EUR/USD investors are going to have to decide whether to sell the Forex pair through 1.1716 and drive it into a value zone or by strength in the market on a trade through 1.2092.

If they can’t make a decision then look for a two-sided trade between 1.1716 and 1.2092 over the near-term until investors are overcome with enough clarity to make a sound decision.