The Euro has dropped to 1.1585 after hitting a high of 1.1730 earlier. Eurostat data reveals an unexpected increase in inflation for September. At the same time, the US Dollar is feeling pressure from trade issues with China and possible Federal Reserve interest rate cuts. As of now, EUR/USD is trading at 1.1685 before the US session. Despite this pullback, the pair looks set to gain 0.6% this week against a weaker US Dollar. Attention is on the upcoming US Industrial Production report and a speech by St. Louis Fed President, Alberto Musalem.

Challenges For The US Dollar

The US Dollar faces headwinds from the possibility of rate cuts and ongoing trade disputes. Fed Governor Christopher Waller is in favor of cutting rates this October, and Stephen Miran supports taking aggressive action. Eurozone data shows a 0.1% monthly rise in inflation for September, with annual inflation climbing to 2.2%. Officials from the ECB suggest we may be nearing the end of the rate-cutting cycle. The Euro is currently strong against the US Dollar, which is headed for one of its worst weeks in months. Trade tensions, signals of Fed rate cuts, and uncertain government funding are all contributing to the Dollar’s struggles. Earlier, EUR/USD saw a pullback to a support level around 1.1690. If it breaks above recent daily highs, it could lead to significant gains, possibly reaching highs from October 1 and September 23. There’s anticipation for the Federal Reserve’s Industrial Production report, which is expected to show a 0.1% growth. St. Louis Fed President Alberto G. Musalem is set to speak soon. There’s a clear difference in central bank policies that benefits the Euro over the US Dollar. The European Central Bank is hinting at ending its rate cuts, which strengthens the Euro. Meanwhile, the US Federal Reserve seems poised to cut rates again, creating challenges for the Dollar. Recent data backs this up, showing Eurozone inflation surged to a 2.2% annual rate in September. The core inflation rate was also adjusted up to 2.4%, the highest since April. This strengthens the case for the ECB to hold off on further easing, further supporting the Euro.

Trading Strategies And Market Outlook

Conversely, the US Dollar is pressured by expectations of more Fed rate cuts and ongoing trade issues. Fed Governor Waller openly supports another cut this month, while the Fed’s recent Beige Book indicates a slowing economy. In 2023, US GDP grew robustly by 4.9% in the third quarter, but discussions of weaker consumer spending signal a shift. For those trading derivatives, a bullish outlook on the EUR/USD pair seems prudent in the coming weeks. Consider buying call options with strike prices above the recent 1.1730 high, targeting levels like 1.1780 or even 1.1820. This allows for potential profit while limiting losses to the premium paid. However, we should be cautious of any short-term pullbacks since some indicators suggest the pair was overbought before its retreat. Today’s US Industrial Production report is crucial; a number below the 0.1% consensus would reinforce the weak Dollar narrative. A surprising upside could lead to a deeper pullback toward the 1.1665 support level. We will closely follow the speech by St. Louis Fed President Alberto Musalem later today. If he confirms a dovish stance, EUR/USD will likely rise. On the other hand, a surprisingly hawkish tone could temporarily boost the Dollar, offering a better entry point for long positions. Create your live VT Markets account and start trading now.

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