An Emerging Bear Trend?

• EUR/USD dropped to new highs near 1.0930 ahead of US CPI.
• The US dollar advanced to multi-week highs back on higher yields.
• The next big event in the FX world will be the US CPI on Thursday.

EUR/USD accelerated its losses on Wednesday and reviewed the 1.0930 region, an area that also coincides with the provisional 100-day SMA.

Meanwhile, the US dollar (USD) gathered further momentum, helped by further gains in US yields across the curve, taking the US Dollar Index (DXY) to fresh multi-week highs, at levels just below the 103 mark ,00.

In addition, the FOMC minutes also supported the greenback. In this regard, the minutes of the September 18 meeting said that a “substantial majority” of rate-setters advocated easing monetary policy by a cut of 50 basis points. However, there was broad agreement that this step did not commit the Fed to a specific future discount rate. In addition, officials felt that the rate cut could better match policy with recent inflation and labor market developments.

On the monetary policy front, market expectations continue to lean towards a 25 basis point interest rate cut by the Federal Reserve at its November 7 event as the likelihood of a significant rate cut has decreased, especially after stronger-than-expected September US jobs report. .

Federal Reserve Chairman Jerome Powell recently reaffirmed a data-driven approach to future rate decisions, suggesting the pace of rate cuts could slow.

Elsewhere at the Fed, Federal Reserve Bank of Dallas President Lorie Logan expressed support for last month’s significant interest rate cut, but argued for smaller cuts amid ongoing inflation risks and economic uncertainties. Similarly, Federal Reserve Vice Chairman Philip Jefferson emphasized that the half-point rate cut was aimed at maintaining a strong labor market despite continued declines in inflation.

Across the Atlantic, the European Central Bank (ECB) took a more cautious tone at its recent meeting due to both inflationary and economic concerns. ECB President Christine Lagarde recently pointed out that while inflation remains high in the eurozone, tight monetary policies are beginning to ease, potentially boosting growth. The ECB aims to achieve the 2% inflation target by 2025.

More on the ECB: Governing Council member Yannis Stournaras said he supports two interest rate cuts this year and expects further easing in 2025. Francois Villeroy also indicated a rate cut next week is highly likely. However, Peter Kazimir expressed skepticism about the need for an imminent cut, citing the importance of future data ahead of the December meeting. Meanwhile, Gabriel Makhlouf highlighted rising risks to inflation due to strong wage growth and persistent services inflation, despite expectations that inflation will reach the 2% target by the end of next year.

Recent data showed that eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), fell below the ECB’s target in September, reaching 1.8% from a year earlier. This only strengthened the belief that the ECB could implement further interest rate cuts in the coming months.

With both the Fed and ECB set to adopt more rate cuts, the outlook for EUR/USD remains closely tied to macroeconomic trends. Against this background, the US economy is expected to outperform its European counterpart, which could provide additional strength to the US dollar.

In terms of market positioning, speculators cut their net long positions in the euro to their lowest levels since late August, while commercial traders cut their net short positions to a six-week low, accompanied by a slight drop in open interest, according to the CFTC. Positioning Report for the week ending October 1st.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further declines may see EUR/USD challenge the October low of 1.0935 (9 October), which is ahead of the weekly low of 1.0881 (8 August).

On the other hand, the 55-day SMA at 1.1034 serves as a temporary barrier ahead of the 2024 high of 1.1214 (September 25), followed by the 2023 peak of 1.1275 (July 18) and the round mark of 1 ,1300.

Meanwhile, the pair’s uptrend is projected to continue as long as it remains above the crucial 200-day SMA at 1.0873.

The four-hour chart now displays an intensification of the downtrend. Against this, the initial dispute lines up at 1.0935, followed by 1.0913 and finally at 1.0881. On the upside, initial resistance comes at 1.0996, ahead of the 55-SMA of 1.1049 and then 1.1082. The Relative Resistance Index (RSI) has dropped to around 26.