- Federal Reserve Chairman Jerome Powell surprised with a hawkish shift in tone.
- Eurozone growth-related figures will take centre stage ahead of the next ECB meeting.
- EUR/USD at risk of falling through 1.0400 as sellers won’t give up.
The EUR/USD pair fell for a second consecutive week, bottoming at 1.0495 on Thursday, its lowest in over a year. The pair got to bounce at the end of the week, recovering on Friday to settle at around 1.0520.
The US Dollar (USD) extended its previous week’s positive momentum amid concerns about what the new United States (US) political picture would mean to the global economy. But at some point, overbought conditions came into play.
Federal Reserve Chairman Jerome Powell
O Thursday, Federal Reserve (Fed) Chairman Jerome Powell participated in a panel discussion titled "Global Perspectives" at an event hosted by the Federal Reserve Bank of Dallas and said that the central bank is likely to cut the benchmark interest rate slowly and deliberately in the coming months, partially because inflation has shown signs of persistence and officials want to see where it heads next. Without directly mentioning it, Powell expressed concerns about the upcoming Donald Trump administration.
Powell also said that the economy is strong. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully,” he added.
His measured approach weighed on market expectations of quick interest rate cuts, resulting in decreased bets of a December trim decline of roughly 10% in one day, according to the CME FedWatch Tool.
Powell’s hawkish stance weighed on stock markets, with Wall Street poised to finish the week in the red, albeit losses seem modest compared to the previous weekly gains. US stocks soared as investors welcomed Trump’s victory in the 2024 presidential election amid hopes his policies will lift corporate earnings.
European Central Bank worries
Across the pond, the European Central Bank (ECB) released the Minutes of its October meeting. The document showed policymakers are quite concerned about economic progress, while they were divided about the risks of inflation coming in too low over a sustained period.
Meanwhile, François Villeroy de Galhau, Bank of France head and ECB Governing Council member noted on Wednesday that US-elected President Donald Trump’s agenda “risks lowering growth a little bit, all over the world. It remains to be seen if the reduction will be felt more in the United States, China or in Europe.”
Keeping an eye on economic data
The Eurozone feared economic weakness was once again backed by macroeconomic releases. The German ZEW Survey showed that Economic Sentiment deteriorated further in November, down in the country to 7.4 from 13.1 in October. The Eurozone gauge fell to 12.5 from 20.1. Finally, the assessment of the current situation in Germany plunged to -91.4. Other than that, the EU published the second estimate of the Q3 Gross Domestic Product (GDP), which was confirmed at 0.4% in the three months to September. On a negative note, Industrial Production fell 2% on a monthly basis in September.
Across the pond, the US published the October Consumer Price Index (CPI) on Wednesday, which showed a modest uptick in inflation. The core annual CPI, however, remained steady at 3.3%. Finally, on Friday, the country published Retail Sales data, which rose by 0.4% MoM in October, better than the 0.3% anticipated by market players. The September reading, in the meantime, was upwardly revised from 0.4% to 0.8%.
The upcoming week will bring speeches from ECB President Christine Lagarde on Monday, Wednesday, and Friday. Also, several ECB and Fed officials will make public appearances throughout the week.
Data-wise, S&P Global will publish the preliminary estimates of the November Purchasing Managers Index (PMI) for all major economies. European ones will be closely watched on Friday, as Lagarde has referred to those several times in the last post-meeting press conference. Other than that, the EU will release the preliminary November Consumer Confidence on Thursday.
EUR/USD technical outlook
From a technical point of view, the EUR/USD pair's bearish strength seems firmly in place in the weekly chart. The pair has extended its decline well below all its moving averages, with only the 200 Simple Moving Average (SMA) gaining downward traction, although above directionless 20 and 100 SMAs. Technical indicators, in the meantime, head firmly south within negative levels, in line with lower lows for 2024.
The daily chart shows that EUR/USD is correcting oversold conditions. Technical indicators have lost their bearish slopes and turned flat at extreme levels, although additional advances seem unlikely at this point. Even further, the 20 SMA heads south almost vertically, over 200 pips above the current level while below directionless longer ones, usually a sign of bears’ dominance.
A break through the 1.0500 mark should lead to a continued slide towards the 1.0440 price zone, where the pair bottomed in October 2023. Further slides expose the 1.0400 level en route to the 1.0320/30 price zone.
Resistance comes at around the 1.0600 threshold, also the former yearly low. A clear advance beyond that level could see the pair extending its corrective advance, yet selling interest will likely resurge on approaches to the 1.0700 mark.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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