EUR/USD Reverses Downward Trend Amidst US Dollar Stability
- EUR/USD finally saw some respite to its strong selling pressure.
- The US Dollar remained mostly sidelined near recent tops on Monday.
- Germany’s Factory Orders contracted more than expected in August.
EUR/USD reversed its multi-day leg lower on Monday, managing to bounce off recent multi-week lows near 1.0950 on an inconclusive start to the week around the US Dollar (USD).
Market Overview
The Greenback, in the meantime, failed to extend its ongoing rally further north of the 102.70 region, despite US yields adding to the ongoing strong rebound and geopolitical concerns in the Middle East escalating further.
In the meantime, it is worth noting that the recent risk-off environment overshadowed investors’ optimism regarding China’s recent stimulus measures aimed at boosting its post-pandemic economy.
Monetary Policy Updates
On the monetary policy front, expectations for further easing by the Federal Reserve (Fed) in the coming months remained in place, although the likelihood of another jumbo rate cut kept shrinking, particularly in response to the stronger-than-expected US jobs report in September.
Recently, Fed Chair Jerome Powell emphasized a data-dependent approach, suggesting that the pace of future rate reductions may slow. However, markets are pricing in the possibility that the Fed will trim its interest rates by 25 bps at its November and December gatherings.
Still around the Fed, Minneapolis Fed President Neel Kashkari highlighted in an event on Monday the resilience of the US economy at the time when he ruled out signs of resurgent inflation.
European Central Bank Outlook
Across the Atlantic, the European Central Bank (ECB) adopted a more cautious stance at its recent meeting amid inflation and economic pressures. ECB President Christine Lagarde highlighted that while domestic inflation remains elevated, restrictive monetary policies are beginning to ease, which could support economic growth. The ECB projects that inflation will reach its 2% target by 2025.
Last week’s comments from ECB Vice President Luis de Guindos suggested that Eurozone growth may be weaker than previously forecast in the short term. However, he expressed optimism about a recovery driven by rising real incomes and the easing of restrictive policies.
Additionally, French Central Bank Chief François Villeroy de Galhau told an Italian newspaper that weak economic growth could increase the risk of inflation falling below the bank’s 2% goal, indicating that interest rate adjustments might be necessary. He reportedly predicted further changes to the deposit rate in the coming year and mentioned that the ECB plans to return to the “neutral” rate at some point by 2025.
Economic Data Impact
Recent data showed that Eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), dropped below the bank’s target in September, hitting 1.8% over the last twelve months. These figures suggest that the ECB may consider reducing further its interest rate rather than pausing its easing process.
Future Outlook for EUR/USD
Looking ahead, additional rate cuts by the Fed could reduce the policy gap between the Fed and the ECB, which might lend support to EUR/USD. The market anticipates two more rate cuts from the ECB and around 50 basis points of easing from the Fed before the year ends. However, the comparatively stronger performance of the US economy may limit any significant weakening of the Dollar.
Germany’s Factory Orders
On the euro calendar, Germany’s Factory Orders shrank by 5.8% in August vs. the previous month, adding to persistent concerns surrounding the economic outlook of the largest economy of the bloc.
Trader Sentiment
On another front, Non-Commercial traders (speculators) reduced their net long positions in the Euro to their lowest level since late August, while Commercial players lowered their net short positions to a six-week low amid a modest decline in open interest.
EUR/USD Short-term Technical Outlook
Further drops may encourage EUR/USD to challenge the October low of 1.0950 (October 4) ahead of the weekly low of 1.0881 (August 8).
On the upside, the initial resistance level is the 2024 top of 1.1214 (September 25), followed by the 2023 peak of 1.1275 (July 18) and the 1.1300 round level.
Meanwhile, the pair’s upward trend is projected to continue as long as it remains above the crucial 200-day SMA at 1.0873.
The four-hour chart demonstrates a worsening of the negative trend. The initial resistance level is 1.1082 ahead of the 200-SMA of 1.1099, followed by 1.1143 and 1.1214. On the other hand, the initial support level is 1.0950, followed by 1.0913 and finally 1.0881. The relative strength index (RSI) decreased to about 31.
Analysis of Content
The article provides a comprehensive overview of the EUR/USD market dynamics, including factors influencing the currency pair’s movement such as US Dollar stability, monetary policy updates from the Federal Reserve and European Central Bank, economic data impact, and trader sentiment. It also delves into the short-term technical outlook for EUR/USD.
For readers unfamiliar with financial markets, the article breaks down complex information into digestible sections, explaining key terms and concepts in an accessible manner. By incorporating charts and visuals, it enhances understanding and engagement with the content.
Overall, the article serves as a valuable resource for investors, traders, and individuals interested in the global economy, offering insights into market trends and potential future developments that may impact their financial decisions.