EUR/USD Falls As Greenback Gains Strength

Key Takeaways

• The ECB has committed to a dovish policy plan moving forward.
• Fed expectations have turned a bit hawkish as October rolls toward its close.
• Key EUR/USD support levels are present at 1.0829 and 1.0724.

Market Overview

October has been a bearish month for the EUR/USD as sellers have dominated the action. As of this writing, the price continues its descent, extending October’s losses to nearly 3%. Shifting Fed policy expectations, as well as a dovish ECB, are the primary catalysts behind the move.

The ECB Goes Dovish

Last Thursday was a red-letter day for the European Central Bank (ECB). Citing disinflation and concerns over economic growth, the ECB slashed interest rates across the board. While the move came as no surprise, the promise of further cuts is now hampering the EUR.

Today brought more news on the ECB front. Policymaker Gediminas Simkus made the case that the ECB’s way forward is dovish. Simkus stated that the ECB will likely reduce rates to between 2% and 3%. This area is referred to by Simkus as the “natural level.” The Lithuanian central banker was very clear on the topic of rate cuts:

“If the disinflation processes get entrenched, it’s possible that rates will be lower than the natural level.”

In short, the ECB appears comfortable adopting a dovish stance toward the EUR. As a result, forex traders continue their exodus from the eurodollar, sending rates to a test of the 1.0800 level. 

Shifting Expectations From The Fed

With about a month until the November Fed meeting, the markets are now pricing in a ¼ point rate cut. At press time, the CME FedWatch Index assigns an 85% chance of the ¼ point November cut coming to fruition. As it stands, there is now a 15% chance of the Federal Funds Rate being held at current levels.

The shifting expectations from the Fed are overtly hawkish despite the pressure to continue cutting rates. However, the US labor market remains in good shape. At this juncture, the Fed may be well-advised to hold rates firm in response to a hot September CPI number. 

With the Fed Announcements 21 days out, we’ll see if this talking point gets traction. If so, holding rates firm will be a hawkish market driver for the USD and a bearish one for the EUR/USD.

EUR/USD: Technical Outlook

Anytime there is a trending market, it helps to look at the larger timeframes for context. The EUR/USD monthly chart illustrates how bad the damage has been this month. Exchange rates are down big as traders evaluate both ECB and Fed policies.

There are two support levels worth watching for the immediate future: Monthly 62% Retracement at 1.0829 and Monthly 78% Retracement at 1.0724. If the 62% level gives way, be ready for a test of the 78% area later this week. Bids from 1.0725-1.0750 are solid trade locations to the bull. We’ll see if this trade idea shapes up by Friday’s bell.

It’s another slow week on the economic calendar. Nonetheless, there should be some good trades to be had. As always, it will pay to be ready for anything as October 2024 rolls to its close.