- EUR/USD recovers to near 1.0770 ahead of Fed policy while Trump’s victory keeps downside bias intact
- German three-party coalition collapsed, paving the way for snap elections in early 2025.
- The Fed is expected to cut interest rates by 25 bps to 4.50%-4.75%.
EUR/USD rebounds to near 1.0770 in North American trading hours on Thursday. The major currency pair bounces back after posting a more than four-month low below 1.0700 on Wednesday. The recovery comes as the US Dollar (USD) corrects ahead of the Federal Reserve’s (Fed) interest rate decision, which will be published at 19:00 GMT.
On Wednesday, the USD Index surged more than 1.6% – the highest single-day gain in almost four years – as United States (US) citizens chose Republican Donald Trump in the presidential elections over Democratic candidate Kamala Harris. The reasoning behind the US Dollar’s rally was Trump’s promise to raise import tariffs and lower corporate taxes. On Thursday, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 104.80 after Wednesday’s rally.
Higher tariffs would make imported products more expensive for US citizens and corporations, likely fuelling inflation. Lower taxes could also stimulate spending, contributing to price pressures as well. This scenario would make it more difficult for the Federal Reserve (Fed) to continue with its rate-cutting cycle.
As for the Fed’s monetary policy meeting, traders have priced in a 25 basis points (bps) interest rate cut that will push interest rates lower to 4.50%-4.75%, according to the CME FedWatch tool. As the Fed is widely anticipated to cut interest rates, investors will pay close attention to the monetary policy statement and Fed Chair Jerome Powell’s press conference. Investors would like to know whether the Fed will slow its policy-easing cycle if Trump implements what he promised during the campaign.
Daily digest market movers: EUR/USD recovery appears to be lacking strength due to multiple headwinds
- EUR/USD recovers to near 1.0770 at the US Dollar’s expense. However, the outlook of the major currency pair remains vulnerable as the Eurozone economy is expected to face a significant burden from Trump’s protectionist policies.
- The blanket 10% tariff on all imported goods advocated by Trump would have a negative impact of 0.1% on the European Union’s (EU) Gross Domestic Product (GDP), according to a recent London School of Economics and Political Science paper.
- At the conference in London on Wednesday, European Central Bank (ECB) Vice President Luis de Guindos warned that tariffs from the US could lead to a vicious cycle of trade war globally. “If you impose a tariff, you have to bear in mind that the other party is going to react, and it’s going to retaliate, and that could give rise to a vicious circle of in terms of inflation, tariffs, which could be the worst possible result and outcome,” Guindos said, Reuters reported.
- Meanwhile, the collapse of the German three-party coalition has also added to downside risks of economic growth in the shared continent. On Wednesday, German Chancellor Olaf Scholz fired Federal Minister of Finance Christian Lindner, paving the way for snap elections in early 2025. “It was necessary to prevent harm to our country,” Scholz said, CNN reported.
- On the economic data front, German Industrial Production declined by 2.5%, faster than 1% contraction expected by market participants in September on month.
Technical Analysis: EUR/USD strives for firm-footing
EUR/USD rebounds to near 1.0770 after discovering buying interest below the key support of 1.0700. However, the major currency pair’s recovery appears to be lacking strength as declining 20-day and 50-day Exponential Moving Averages (EMAs) near 1.0860 and 1.0920, respectively, suggest a strong bearish trend.
Additionally, the 14-day Relative Strength Index (RSI) retreats below 40.00, suggesting a resumption of the bearish momentum.
The upward-sloping trendline around 1.0800, which is plotted from the April 16 low at around 1.0600, will act as a key resistance zone for Euro (EUR) bulls. Looking down, the shared currency pair could decline to the year-to-date (YTD) low of 1.0600.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing 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 may lower interest rates to encourage borrowing, which weighs on 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. The FOMC is attended by twelve Fed officials – 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 one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 in 2008. It involves the Fed printing more Dollars and using them to buy high grade 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 from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
