The All-Star Pair – EUR/USD: The Topping Pair
In the world of forex, if there was a most adored pair, it would be EUR/USD without debate. It is the Brand of Currency Pairs; everyone has a view, it has a large user base and at times it drives you insane. Still, you come back because at the end of the day, you know it is a loyal.
Two of the largest economies in the world the United States and the European Union are contained within the EUR/USD currency and it is the most widely used on the market. Liquidity? Yes. Volatility? Lots of it. Opportunity? Well, let’s just say it’s like waiting for the next Cristiano Ronaldo to emerge. The only challenge is knowing how to weather the storm of the rises and falls.
Fast forward to October 2024, and this pair has, substantiating my last point, been slightly depressed. The European Central Bank (ECB) Last week made a decision to lower interest rates while the Federal Reserve was making plans for their next move on November 6. My forecast? Why yes, because I believe Jerome Powell and the Fed are going to cut back on their aggressive stance and cut rates. It's called ‘a hunch’ after spending lots of time in the industry. Also it is obvious in my opinion that the euro will soar like a phoenix from the ashes – I expect it to reach 1.2000, which is the value before the pandemic.
So without wasting any more time, let's get into the details one by one – seriously, one by one – and see what the future appears to hold for this zloty eur pair.
The Current Market Overview: A Tale of Two Central Banks
Interestingly enough, what particularly in the recent days has been the story of both the EUR/USD and the EUR pairs? In a word, it has been steady due to the monetary policy divergence of the European and US central banks, which is comparable to viewing two soccer teams attempting to run distinct plays on the field. Spoiler alert: this never ends well.
ECB – The Cautious Contender: Last week Christine Lagarde and her colleagues from the ECB decided to lower rates to 3.50 percent. After raising rates for the better part of the past year due to stubborn inflation, we hear them say, “That is enough for now”. Why? Because while the inflationary pressure still exists, eurozone economy appears to be on the rocks. Growth is majorly stalling in economies like Germany and France, and who wants to push rates up in a recession, failed a team when it is already on the floor?
Having said that, the ECB is being pretty cautious and quite rightly so. Lagarde hinted that the current level of rates may be just sufficient to control inflation. So, they are parking the bus for the circumstances for action in future – for the monster of inflation to subside.
The situation is rather dire within Eurozone with growth barely existing, with Germany even teasing the fine line of the “R” word.
The narrative of inflation affecting purchasing power is sticky but has some positives by hinting there are signs inflation is shifting limelight from other variants, which is why we see the MPC stance of the ECB to remain neutral.
The Fed – The Wild Card: So, for the other side of the Atlantic, the Federal Reserve has taken a different route. It seems that while the ECB is pausing, the Fed was in a more hawkish mode… until now. It’s as if over the last year, they’ve been trying to win a marathon by boosting interest rates but November 6th could be the turning point they were looking for.
Now, here's the fun part: In two weeks time, I expect the Fed to make a rate cut. Yes I’m saying it right. Although inflation is still slightly higher than the target, it is on a decreasing trend whilst the growth rate of the US GDP has reached an impressive 4.9% as at Q3 2024. The Fed is in a position to ease off the brakes a bit and once they do, a reduction in the strength of the US dollar could be expected.
Inflation on a US basis is falling, although still higher than the 2% target.
The economy is still strong but the Fed may, however, look to encourage that growth through the cut of interest rates.
So, what does this divergence imply regarding the EUR/USD pair? For the short term, it looks like the dollar gets more strength but should the Fed enact the cut, I’ll be looking towards a reversal which would propel the euro to greater heights. We shall cover more on this subject in the latter section.
EUR/USD: A Fundamental Analysis
Let’s get into the fundamentals now, the little particulars that make the EUR USD pair tick.
The euro area fundamentals: Life hasn’t been easy for the Euro lately, as the European economy looks as weak as a newly funded trader at their first margin call (and believe me, I have seen that look), which isn’t very comforting. The German economy is grappling with stagnation of industrial growth, and inflation has subsided but still above the ECB target of 2%.
Germany, and France have been lagging behind, with economic data forecasting a slow growth rate and decline in industrial outputs.
The controversial rate hikes by the ECB seem to be working on inflation but brings in a new worry of stagflation or complete recession.
As per ECB’s wait-and-watch attitude, rates could be raised again only if inflation rates go up unexpectedly. But the downside? No change for the euro bastion like anticipation continues that the US offers more prospects for development (and higher profits).
US Fundamentals: On the other hand, the US economy looks to be in a better place than Europe for the time being. The economy expanded by 4.9% in the third pinning itself well over expectations. Inflation is still slightly elevated but it’s coming down which allows the Fed some breathing space. So far my prediction still stands with a rate cut in November for the United States.
Inflation, conforming the expectations, is trending downwards but still above the Fed’s target.
Vital growth momentum is preserved by the US labor market, which seems quite robust.
So what is the effect of a rate cut by the Fed? This might lead to a weaker dollar as investors anchor towards better returns abroad and we may finally see the euro having its day in the sun. I honestly think we need to see the Fed shift towards a dovish stance which would also help bring about the european shift.
Joke Break: Why was the Euro feeling awkward at the forex party? Because it was amidst all the larger currencies and it could not find an appropriate ‘rate’ for itself. (But don’t worry EUR your time is coming.)
Technical Analysis: Fight A Man, Read the Charts.
Okay now let’s move on to the technicals – because what’s a forex report without the best bit, the charts, right?
The euro has been performing weak against the dollar, but there’s a possibility of a turnaround if the Fed actually does what I expect it to do. So let’s analyze the key levels and the indicators.
Support And Resistance Key Levels:
Support: 1.0450 (as a significant psychological level), 1.0380 (last bottom).
Resistance: 1.0650 (immediate resistance), 1.0800 (resistance that could be long-term).
We have observed the pair’s attempt to conquer the 1.0450 mark and if this fails, we might plunge to 1.0380 which will be the first time this pair hits those levels this year. But here’s the thing: 1.0650 is what I expect the pair to return to if the Feds do cut rates and break the strongest borders. If it did break that border then I foresee 1.0800 coming up automatically.
Moving Averages:
Bearish for the short term that’s what I foresee moving a little forward, the 50 MA has still be falling and retesting levels above.
The current price is still remarkably far from the 200-day moving average, which provides additional confirmation of the downtrend mode for the longer time frame.
RSI (Relative Strength Index): The RSI is located just below level 40, which means that the pair is nearing oversold territory. However, should the market take up my prediction of a rate cut by the Fed, we may witness a bounce back in the EUR/USD as the mood shifts.
Potential Scenarios Based on Technicals:
Bearish Scenario: The pair is forecasted to break below 1.0450, with the next brake zone focused on 1.0380 if the Fed continues its hawkish approach and euro remains a risk in the forex market.
Bullish Scenario: A more interesting scenario might arise if the Fed does a rate cut (which I expect will happen), allowing the euro to bounce back, crossing 1.0650 resistance and aiming towards 1.0800.
Outlook & Forecast: My Bold Prediction
In order for me to be brave, I now want to be brave. I’m making the prediction now – the Fed will implement a rate cut in November. As soon as this occurs, the US dollar will weaken and the euro gets room to breathe.
Sentiment in the Short-Term: In the short run, my view is that the support level for the EUR/USD will be in the region of around 1.0450. In the event that the Fed cuts rates, the pair is likely to rise to around the 1.0650 mark and probably reach 1.0800 before the end of the year.
Outlook for the Long Term While I’m long term bullish on the EUR/USD, I believe that the pair will move back up to 1.2000 -the level it was prior to the onset of the pandemic. Certainly, a target that appears a bit too aggressive but allow me to provide reasons for my outlook:
We are likely nearing the end of the rate hiking cycle, and alongside that, the Fed may opt to soften its stance in 2024 as inflation begins to subdue.
We should see the eurozone economy recover as inflation eases and growth in Germany and France picks up once again.
There isn’t going to be strength in the dollar for an indefinite period, especially with tightening measures from the fed ending. This will then provide the euro with a scope to recover.
In 2025 I anticipate the pair will be oscillating around the 1.2000 mark, which would represent a complete recovery to the Figures pre-pandemic. This is a long term bet and thus requires a lot of patience, but I believe there is a chance for a v-shaped recovery of the euro.
Joke Break #2: Did you hear about the EUR/USD trader who always carried a ladder to the office? He thought the euro was going to go “up!” (Well, I should leave now…).
Conclusion: What Comes Next for the EUR/USD Pair?
To summarize, it appears that the past few months have been a struggle for the EUR/USD, but there is light at the end of the tunnel for me. The ECB's stance over interest rates and potential rate cuts for the Fed in November 2020 makes me hopeful of a turnaround.
This short-term outlook is for the pair to hold support around 1.0450 and for an upward attempt towards the resistance level of 1.0650 or thereabouts, pushing past 1.0800 if the Fed cuts rates. For the more extended period, my target is to hit 1.2000 by the end of 2025 where the eurozone is likely to be more stable coupled with deterioration of the dollar as well.
And do not forget in forex, the same as in life, patience is the name of the game. EUR/USD will annoy you at times but if you stay with the fundamentals and sane technicals then eventually, it will be worth it. It’s just like hoping for Man Utd to win another league title… it will happen.
