Weekly EurUsd Outlook for August 5, 2024 – Markets Anticipate Fed & ECB Rate Cuts Amid Economic Uncertainty

• Powell has deferred any rate decisions to September, but the market remains unsatisfied and demands more action in the final meeting before the presidential elections. This urgency is fueled by a rapidly deteriorating labor market.
• In Europe, disappointing data continues to emerge from Germany, with its GDP falling into recession in the second quarter. The ECB is also likely to cut rates in September.
• EurUsd remains in a low-volatility, sideways movement as it awaits clearer intentions from both the US and Europe, testing the 1.09 resistance level.

Fed Defers Rate Decision to September Amid Rising Employment Concerns

The Federal Reserve has kept interest rates unchanged as expected, deferring any decisions to September, contingent on upcoming data confirming the rising inflation trend seen so far. Consequently, the market has responded by further lowering long-term interest rates, convinced that there will be multiple rate cuts. The 10-year yield has dipped well below 4%, and stock markets reacted negatively to Powell’s promises, fearing that the Fed might be too timid.

The key data point causing volatility was employment figures. The market didn’t have to wait long to see its evolution. On Thursday, unemployment claims hit a one-year high, and on Friday, new hires were only 114,000, well below estimates. More concerning was the unemployment rate rising to 4.3%. Inflation data will take longer to materialize, but this time it seems the Fed will likely appease the markets, which are now pushing for more due to the swiftly deteriorating economic situation. Could we see a 50 basis point cut?

By cutting the cost of borrowing in September, Powell would face fierce criticism from Trump, especially since this will be the last meeting before the presidential elections. Trump views this move as potentially favoring the Democrats. Consequently, markets are leaning towards a rate cut, which currently leaves the dollar indifferent, losing ground to a strengthening yen after the BOJ’s surprise rate hike. Regarding Euro, a potential rate cut might have to wait until September, but Germany’s recession in the second quarter of 2024 hints that the ECB in Frankfurt might also seize the opportunity presented by the Fed for a further rate cut.

Before then, all eyes will be on Jackson Hole at the end of August, where central bankers will have the opportunity to clarify their intentions. Meanwhile, EurUsd is challenging resistance levels.

Technical Analysis – EurUsd Nears Critical Juncture

If there’s one chart that perhaps best illustrates the uncertainty surrounding EurUsd, it’s the daily chart combined with the 50 and 200-day moving averages. These typical lagging trend indicators (golden cross for bullish and death cross for bearish) have been giving continuous false signals, confirming significant underlying uncertainty.

However, the decisive moment is approaching. Between 1.07 and 1.09 (where we currently are), the upper and lower walls of this theoretically bullish continuation triangle are converging. Should this scenario play out, breaking above 1.09/1.10 (currently tested resistances) will signal a long position on the euro. Conversely, falling below 1.07/1.06 will see the dollar resuming its march towards parity.

Monitoring EurUsd’s performance and, crucially, its breakout from the upper or lower range will likely determine the direction for the next cyclical milestone. The summer months of 2025 will see the next 34-month cycle milestone, following three primary lows and three primary highs in recent years. Therefore, close attention to the previous chart and its subsequent evolution is crucial.