EUR/USD is near its lowest level since mid-August, looks vulnerable around the 1.0975 area

VaselineOctober 7, 2024

0 3 minutes read

EUR/USD is near its lowest level since mid-August, looks vulnerable around the 1.0975 area

EUR/USD is entering a bearish consolidation phase after last week’s dip in the mid-1.0900s.
USD holds on to post-NFP gains at a multi-week high and caps the pair’s upside.
Bets on another ECB rate cut in October undermine the euro and continue to act as a headwind.

The EUR/USD pair is starting the new week on a subdued note and consolidating last week’s heavy losses to its lowest level since mid-August following Friday’s upbeat US employment details. Spot prices are currently trading around the 1.0975 region and look vulnerable to extending the recent sharp pullback from a 14-month high – levels just above the 1.1200 mark.

The US dollar (USD) is near a seven-week high as traders further cut their bets on another excessive rate cut by the Federal Reserve (Fed) in November, amid surprisingly strong data on seats of US labor. The NFP headline showed the economy added 254,000 jobs in September, beating consensus estimates by a wide margin, and the unemployment rate unexpectedly fell to 4.1%. That provided evidence of a still resilient US labor market, while a stronger-than-expected rise in average hourly earnings revived inflation fears, dashing hopes for more aggressive policy easing by the Fed.

In fact, current market prices point to a near 95% chance that the Fed will cut borrowing costs by 25 basis points at the end of a two-day policy meeting on November 7. in the Middle East helped the USD index (DXY), which tracks the greenback against a basket of currencies, record bets for the week of September 2022. The single currency, on the other hand, continues to be undermined by bets that Europe Central. The Bank (ECB) will cut interest rates again in October amid easing inflationary pressures and the economic slowdown.

Expectations were bolstered by comments from ECB Governing Council member Francois Villeroy de Galhau, who said the central bank would cut interest rates in October as weak economic growth raised the risk of inflation exceeding its 2% target. This, in turn, is seen as another factor acting as a headwind for the EUR/USD pair and supports the prospects for a further bearish move in the near term. Therefore, any attempt at a recovery could still be seen as a selling opportunity, and it runs the risk of fizzling out rather quickly.

Fed FAQ

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability and to promote full employment. Its main tool for achieving these objectives is the adjustment of interest rates. When prices rise too quickly and inflation is above the Fed’s 2 percent target, it raises interest rates, raising borrowing costs throughout the economy. This results in a stronger US dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates to encourage lending, which hurts the greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials participate in the FOMC—the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve rotating one-year terms. .

In extreme situations, the Federal Reserve can resort to a policy called 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy higher quality bonds from financial institutions. QE usually weakens the US dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds at maturity to buy new bonds. It is usually positive for the value of the US dollar.

VaselineOctober 7, 2024

0 3 minutes read

Fed FAQ

Vaseline

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