EUR/USD Struggles to Break Key 1.1000 Barrier Amid Mixed Economic Signals
The EUR/USD currency pair concluded Tuesday’s trading session around the 1.0970 mark, showing minimal change from Monday’s closing price. Earlier in the day, the pair attempted to breach the significant 1.1000 resistance level, but the effort lacked sufficient momentum.
The US Dollar displayed a mixed performance, alternating between gains and losses at the higher end of its trading range. This fluctuation came as investors remained cautious following reports of potential ceasefire discussions between Israel and Hezbollah, contributing to a risk-off sentiment in global markets.
Despite optimism surrounding China’s stimulus measures aimed at revitalizing its post-pandemic economy, the prevailing risk aversion overshadowed these positive developments.
On the monetary policy front, market expectations continue to lean towards further easing by the Federal Reserve (Fed) in the upcoming months. However, the prospect of a significant rate cut has diminished, particularly in light of the stronger-than-anticipated US jobs report released in September.
Fed Chair Jerome Powell emphasized a data-driven approach to future rate decisions, suggesting that the pace of rate reductions may slow down. Currently, markets are pricing in a potential 25 basis-point rate cut during the Fed’s meetings in November and December.
In a show of support for additional interest rate cuts, Fed officials expressed their views on Tuesday. St. Louis Fed President Alberto Musalem advocated for further reductions as the economy evolves, while New York Fed President John Williams indicated that more cuts could be appropriate "over time" following September’s half-point reduction. Additionally, FOMC Governor Adriana Kugler voiced strong support for recent cuts and indicated readiness for further easing if inflation trends downward as expected.
Across the Atlantic, the European Central Bank (ECB) adopted a more cautious approach in its recent meeting due to ongoing inflationary pressures and economic challenges. ECB President Christine Lagarde remarked that while inflation in the Eurozone remains elevated, the easing of restrictive monetary policies could support economic growth. The ECB anticipates inflation will reach its 2% target by 2025.
Earlier in the week, ECB Vice President Luis de Guindos suggested that Eurozone growth may weaken in the short term but expressed optimism for recovery driven by increasing real incomes and loosening monetary policies. French Central Bank Chief François Villeroy de Galhau warned that low economic growth could lead to inflation falling short of the bank's 2% target, potentially prompting rate adjustments. He predicted further changes to deposit rates and a return to a "neutral" rate by 2025.
Recent data indicated that Eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), dipped below the ECB's target in September, reaching 1.8% year-on-year. This development reinforces the possibility of the ECB considering additional rate cuts in the coming months.
With anticipated rate cuts from both the Fed and the ECB, the outlook for EUR/USD increasingly hinges on macroeconomic conditions. The US economy is projected to outperform its European counterpart, which may lead to additional strength for the US Dollar.
In terms of positioning, Non-Commercial traders (speculators) have reduced their net long positions in the Euro to their lowest level since late August, while Commercial players have cut their net short positions to a six-week low, as indicated by the CFTC Positioning Report for the week ending October 1.
Should further declines occur, the EUR/USD may test the October low of 1.0950 (recorded on October 4), followed by the weekly low of 1.0881 (noted on August 8).
On the upside, there is an initial resistance level at the 55-day Simple Moving Average (SMA) of 1.1032, ahead of the 2024 peak of 1.1214 (recorded on September 25), followed by the 2023 high of 1.1275 (noted on July 18) and the round number of 1.1300.
The pair's upward trend is expected to persist as long as it remains above the critical 200-day SMA of 1.0873.
The four-hour chart indicates a consolidative phase for the time being. The initial resistance level is at 1.1082, followed by the 200-SMA at 1.1094, and then 1.1143. Conversely, initial support is found at 1.0950, followed by 1.0913 and then 1.0881. The relative strength index (RSI) has dropped to approximately 35, indicating potential bearish momentum.