The US dollar index was trading lower in the early European trade, giving back some of its gains from Tuesday. This meant that the EUR/USD was trading modestly higher. FX markets are now likely to remain in a holding pattern until the Fed’s rate decision followed by Powell’s press conference taking place 30 minutes later.
While we have seen a slightly stronger headline US retail sales and industrial production data in the previous session, these did not lead to any changes market’s pricing of the size of the rate cut. The upcoming release of a few other second-tier US data that are due before the FOMC decision later are unlikely to trigger any major moves either.
That’s because markets remain quite uncertain over the size of the forthcoming rate cut and the remaining data releases won’t have much influence on that decision. As far as the EUR/USD outlook is concerned, a lot will depend on the pace of future ECB vs. Fed rate cuts.
The ECB might have started this race first, the Fed is likely to outpace it in the next few meetings. For that reason, the EUR/USD may be able to rise further in the weeks and months ahead, especially if Kamala Harris wins the US presidential election race. But today, it is likely to at least monetarily dip as the Fed may opt for 25 basis points instead of 50 bps cut, leaving some investors disappointed.
So, what will the Fed decide?
Despite hotter inflation data last week, the focus has shifted toward economic growth and the slowing jobs market, which has prompted the Fed’s dovish pivot. With equal chances of a 25 or 50-bps cut, the US dollar has weakened. Investors will likely hold steady until the rate announcement.
The rate decision itself will send the dollar in the direction of the surprise, so traders seeking to mitigate that risk may wish to wait for Powell’s press conference, where the Fed Chair could hint at larger easing down the line, keeping the dollar under bearish pressure.
Indeed, markets remain quite uncertain over the size of the rate cut. Just last week, the release of slightly stronger US core CPI and PPI inflation data left investors speculating about a dovish move. However, rates markets have since started to price in a 50-basis point cut instead of 25, with around a 60-65% probability compared to around 35% last week.
Should the US central bank opt for 25 basis point instead, this should come as a surprise to the market now and therefore trigger a dollar rally – even if it ultimately proves to be short-lived as the Fed Chair Powell could deliver a more dovish assessment of the economy and interest rates at his press conference. So, there is the potential for the EUR/USD to drift lower and move back below the 1.1100 handle, before potentially resuming higher.
Why the EUR/USD could remain supported
With a struggling Chinese economy, which is not great for Eurozone exports, and continued weakness in Eurozone data, you can’t be too bullish on the euro at this stage. However, uncertainty over inflation means the EUR/USD outlook is not necessarily bearish.
The Fed is seen cutting rates faster than the ECB over the next several meetings, which should narrow the yield differential between US and Eurozone bonds, and in doing so keep the EUR/USD supported. Therefore, my slightly bullish EUR/USD outlook is more a function of falling US interest rates and the dollar than necessarily being bullish on the euro itself.
Pace of ECB’s rate cuts may be slower than expected
The ECB followed through with an expected 25 basis point rate cut last week. President Christine Lagarde's calm and predictable communication style dominated at the ECB press conference, as she emphasised data dependency and kept forward guidance minimal, hinting at future cuts. But this leaves the door wide open as to what they will do in the remaining meetings of this year.
With a struggling Chinese economy, the Eurozone is unlikely to show any solid performance in these last few months of the year. Here, inflation remains a bit sticky because of the stronger wage growth in the services sector. While we are unlikely to see the same levels of inflation as last year, the ECB will probably not cut rates too hastily this time.
That’s what Governing Council member Martins Kazaksthough hinted at, due to lingering inflation risks. ECB President Christine Lagarde hinted on Friday that the next rate reduction is likely in December. Thus, if the pace of ECB’s rate cuts proves slower than the market is pricing, this should keep the euro in an overall bullish trend.
EUR/USD technical analysis and trade ideas
Source: TradingView.com
The underlying trend for the EUR/USD is currently positive given the upward-sloping 21- and 200-day moving averages, the higher lows etc. But the currency pair has been in holding inside a 200-pip range since the middle of August, between 1.10 and 1.12.
For as long as the lower end of this range holds, the short-term technical EUR/USD outlook will remain bullish. This means that even if the EUR/USD drops in reaction to the Fed’s decision today, say as a result of a 25bps cut instead of 50, for as long as support around 1.100 area holds on a closing basis, this shouldn’t be too concerning for the bulls. However, if support here breaks down in the coming days, then that would be a bearish development.
On the upside, the next bullish targets from here are liquidity resting above the highs of August 2024 and July 2023 at 1.1201 and 1.1275, respectively. That’s where sellers’ stops are likely to be resting.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.