Weekly EUR/USD Outlook October 21, 2024 – European Disinflation Accelerates as ECB Cuts Rates, Dollar Strengthens

• U.S. central bankers remain hesitant to cut interest rates, expressing their position across various forums. While they acknowledge the need to ease monetary policy, they advocate for a cautious approach. The unexpected halt in the decline of consumer and producer prices weighs heavily on these considerations.
• Meanwhile, the ECB aligns with market expectations, confirming a 25 basis point rate cut. This move signals the likelihood of further cuts in the coming months, as the central bank acknowledges that the disinflationary process is advancing faster than anticipated.
• EUR/USD is approaching key support levels around 1.08 after breaking below 1.10. This level will be crucial in determining the trend of the pair through the end of the year.

Federal Reserve Urges Caution as ECB Cuts Rates, Euro Weakens

This week, various Federal Reserve officials urged caution regarding interest rate cuts. Yes, cuts may come, but with careful consideration, always factoring in inflation trends and employment data. Consumer prices in September halted their deceleration, though the labor market appears unaffected for now. The two rate cuts the market anticipated by year’s end are no longer a sure thing, a reality acknowledged by several markets, including the foreign exchange market.

Meanwhile, with the U.S. presidential elections nearing, the race between Trump and Harris remains neck-and-neck, although media and analysts are far less energized compared to four years ago.

In Europe, the ECB met expectations by cutting rates by 25 basis points. ECB President Christine Lagarde confirmed that the disinflationary process in Europe is well underway, with the 2% inflation target projected to be reached by 2025. Risks to growth remain tilted to the downside, allowing for more expansive monetary policy in 2024-2025, provided data continues to support these projections. Bond markets are pricing in further yield reductions, and the euro is weakening, approaching key support levels against the dollar.

Technical Analysis – EUR/USD Hits Key Support, Rebound Possible

The scenario laid out last week for EUR/USD has materialized fully, with the greenback breaking below the crucial 1.10 level and easily reaching 1.08 ahead of the ECB meeting. However, this is where the real challenge begins for the dollar, at least from a technical analysis perspective.

As seen in the chart, EUR/USD entered oversold territory just before reaching key support levels. In the last two instances, this has been a significant factor halting the dollar’s advance. In October 2024 and April 2024, oversold conditions marked the primary bottoms from which the euro rebounded. Will this pattern repeat itself this time?

The double top formed by EUR/USD near the 1.12 resistance levels triggered a relentless wave of selling pressure on the euro. This market “sell-off” was fueled by the idea that while the ECB will likely continue cutting rates, the Fed might reconsider further action given recent data.

This movement in the world’s most traded currency pair temporarily pushed EUR/USD below the downtrend line that had capped its gains up to August. The chart clearly shows that the key support is around the 1.08 level. A break below this would suggest the exhaustion of the bullish trend for the euro that began in late 2022.