Federal Reserve’s Role

Minutes from the Federal Reserve show that rate cuts may continue this year due to concerns about employment and inflation. There is a discussion among officials about what the neutral federal funds rate should be. Nine policymakers support two cuts, while Stephen Miren suggests the possibility of more cuts. Money markets predict a 94% chance of a 25 basis point rate cut at the next meeting. The EUR/USD is above 1.1600, but the RSI shows bearish momentum. If it falls below 1.1600, support levels will be at 1.1574 and 1.1391. Resistance levels are at 1.1700, 1.1760, and 1.1830. The Euro, used by 19 EU countries, is second to the US Dollar in global transactions. In 2022, it represented 31% of currency trades, primarily through the EUR/USD pair. The European Central Bank (ECB) sets monetary policy for the Eurozone, focusing on price stability by either fighting inflation or promoting growth. Economic data from the Eurozone, including inflation, GDP, and trade balance, impacts the Euro’s strength. Strong data tends to attract investment, boosting the Euro, whereas weak data can weaken it. A positive trade balance increases currency value due to higher demand for exports, while a negative balance can have the opposite effect.

Market Dynamics

Right now, the Euro’s weakness is the main theme affecting the EUR/USD exchange rate. Ongoing political instability in France, stemming from last year’s elections, adds uncertainty that burdens the single currency. This political risk and a noticeable economic slowdown in Germany create significant challenges. The recent German industrial production data shows a concerning 4.3% drop month-over-month. Such a decline is rare and historically signals a wider recession, as seen during the downturn in 2020. We will keep an eye on upcoming German trade balance data and ECB minutes for indications that policymakers recognize this slowdown. On the other hand, the market has nearly fully anticipated a 25 basis point rate cut by the Federal Reserve during its meeting on October 29. This expectation is backed by September data, which showed Non-Farm Payrolls at a modest 150,000 and Core CPI cooling to 2.8% year-over-year. Normally, a rate cut would weaken the dollar, but the Euro’s challenges are currently more pressing. Traders might consider positioning for a potential drop below the 1.1600 level in EUR/USD. Buying put options with strike prices like 1.1550 or 1.1500 for late October or November might be a smart strategy to benefit from further declines. With many central bankers scheduled to speak, we expect increased volatility, making options strategies more appealing than direct short positions. The main risk to this bearish outlook is an unexpectedly dovish response from Federal Reserve officials this week. If Chair Powell hints at more aggressive or rapid rate cuts, it could overshadow the Euro’s weaknesses and trigger a sharp upward move. Therefore, any short positions should be safeguarded with defined risk or tight stop-loss orders above the 1.1700 resistance level. Create your live VT Markets account and start trading now.

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