Rewritten and Expanded Version of the Original Article by Yohay Elam | FXStreet
Title: EUR/USD Weekly Forecast: Can the US Dollar Recover Following the Latest Federal Reserve Surprise?
The global currency markets saw increased volatility following the Federal Reserve’s latest monetary policy decision, with the US Dollar’s fate hanging in the balance. The EUR/USD currency pair continues to attract trader attention, especially in the wake of recent central bank commentary and macroeconomic data. As unpredictable global economic conditions unfold, traders are now asking: is there still life in the US Dollar, or will the Euro capitalize on shifting sentiment?
This report analyzes the key elements influencing the EUR/USD outlook for the coming week, covering monetary policy, economic data, technical trends, and macro-fundamentals.
The Fed’s Surprise: Dovish Shift Shakes Markets
The most recent Federal Open Market Committee (FOMC) meeting revealed a subtle but significant change in tone. Despite keeping interest rates unchanged, the Federal Reserve struck a dovish note that caught markets off guard.
Key takeaways from the Fed’s recent message:
– Policy rates remain unchanged, within the 5.25% to 5.50% range
– Fed Chair Jerome Powell acknowledged progress on inflation but warned it’s too early to cut rates
– No rate cuts were announced, but the messaging leaned more dovish than anticipated
– Powell stated that financial conditions had already tightened, reducing the urgency for further hikes
– The updated dot plot still projects rate cuts in 2024, supporting a softer US Dollar outlook
Markets interpreted Powell’s communication as a sign that the rate hike cycle may have already peaked. As a result, the US Dollar saw selling pressure, and risk assets gained ground. Still, ambiguity in messaging leaves room for speculation on the Fed’s next move, especially with inflation still above target.
US Economic Data: Mixed Signals
The US economy continues to send contradictory signals, preventing traders from reaching a consensus on the path of interest rates.
Important recent data releases:
– GDP Growth: The US economy expanded at a 4.9% annualized pace in Q3, exceeding forecasts but driven largely by volatile consumer spending data
– PCE Inflation: The core Personal Consumption Expenditures (PCE) Price Index for September slowed to 3.7% annually from 3.8% in August, suggesting cooling inflation
– Job Market: Initial jobless claims remain historically low, indicating a tight labor market
– Consumer Confidence: Declined notably in October, suggesting households may be losing faith in economic resilience
This combination of strong GDP and employment data with weakening consumer sentiment and slightly lower inflation adds to market uncertainty. For EUR/USD, this data mix offers limited directional clarity but supports a cautiously bearish stance on the Dollar.
The European Central Bank’s Cautious Stance
In Europe, the European Central Bank (ECB) has also pressed the pause button on monetary tightening. In its October meeting, the ECB decided to maintain interest rates, following 10 consecutive hikes.
Main points from ECB President Christine Lagarde:
– The ECB believes inflation is declining, and past interest rate hikes are beginning to be transmitted into the economy
– Lagarde emphasized that borrowing costs are now “sufficiently restrictive” to bring inflation down to the 2% target over time
– No indication was given about potential rate cuts, but the central bank appears to be in wait-and-see mode
European inflation data supports the ECB’s cautious tone. The Harmonized Index of Consumer Prices (HICP) declined to 2.9% in October from 4.3% in September, marking the lowest level since mid-2021. Core inflation also moderated from 4.5% to 4.2%. These figures provide the ECB with further justification for holding policy steady as it continues to monitor lagged effects of previous hikes.
German GDP shrank by 0.1% in Q3 2023, adding to concerns about
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