(MENAFN- Daily Forex)
The setup behind the EUR/USD exchange rate is constructive, and there's a good chance the 2024 rally will be tested either this week or next. The European Central bank cut interest rates last week, but this move did not impact the Euro. Now, it's the federal Reserve's turn to cut US interest rates, and the impact on the financial markets will be more pronounced. Ahead of that, the Euro/Dollar is stabilizing around the 1.1130 level.
According to
Forex trading, the EUR/USD pair witnessed strong buying interest last Thursday on the back of clear leaks from the US Federal Reserve that gave a strong hint that it will start with a decisive 50 basis point rate cut instead of the usual 25 basis point move. The leaks came via a number of financial news outlets, most notably from a Wall Street Journal journalist known for his close connections to policymakers. The Fed is still facing a“go big or go small” dilemma, says journalist Nick Timeraos.
Commenting on the pair's performance, analysts at MUFG Bank said, "The EUR/USD pair has received an additional boost from growing speculation that the FOMC may cut interest rates by 50 basis points," adding, "It is interpreted by the markets as an orchestrated move by the Fed as this journalist is known for his ties to the Fed... We don't know if this Wall Street Journal article was coordinated or not, but this makes the decision next week well-balanced."
Sam Hill, Head of Market Insights at Lloyds Bank, says, "One might think that Fed officials wouldn't leak hints of a 50-basis point rate cut if they felt that the market's pricing of a 25-basis point cut (which the market converged on after the CPI) was consistent with the FOMC's assumptions.". Also, he explains that the Fed may have preferred a slight amount of pricing wiggle room to reflect the diversity of views in the discussion. "But actively encouraging the market to add more return-seeking bets (via comments from former staff and WSJ's Nick Timiraos), then delivering less, could raise questions about the credibility of the communications process during the blackout period."
Overall, the improved odds of a 50bp cut have weakened the US dollar, breaking the EUR/USD low in September. The euro is likely to extend its rally against the dollar if the Fed actually cuts 50bp on Wednesday. The obvious risk to the bullish setup is if the rumours prove unfounded and officials cut by only 25bp.
Disappointment is likely to lead to a sharp decline in EUR/USD, but we believe the weakness will be limited as a smaller cut is likely to be accompanied by forward guidance suggesting at least one more 50 basis point move before the end of the year.
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As expected, the EUR/USD pair will maintain its upward trajectory pending the market's and investors' reaction to the announcement of US interest rate decisions this week. The 1.1200 resistance will remain the most prominent on the daily chart, confirming the bulls' strong control of the trend. If the US dollar weakens further following the Fed's announcement, the Euro/Dollar may find opportunities for further upward movement, and the next targets will be 1.1265 and 1.1335. The last level, in turn, will move technical indicators towards strong and sharp overbought levels. Conversely, and on the same timeframe, the 1.0885 support level will remain the most important to evaporate the current bullish hopes.
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