The European Central Bank’s 50-point rate cut may become a surprise that will drown the euro even more. However, a cut by 25 bp has already been factored in EURUSD quotes, which may result in a pullback. Let’s discuss it and make a trading plan.
The article covers the following subjects:
Highlights and key points
- A Trump trade revival is supporting the U.S. dollar.
- The Fed can afford to hold back a bit.
- The ECB’s decisiveness will cost the euro dearly.
- EURUSD growth above 1.0915 is a reason to buy.
Fundamental forecast for euro for today
A Trump trade is coming back! EURUSD has continued falling despite positive German economic sentiment index and European industrial production data. Donald Trump called “tariff” “the most beautiful word in the English language,” and anticipation of new trade wars pushed investors to seek refuge in the U.S. dollar, especially as the Republican leads in the polls once again.
Weak eurozone data contrast with strong U.S. data. The U.S. economy is again defying gravity, so the currency bloc’s problems have finally caused investors to hesitate. Although European economy has looked remarkably resilient in 2024 despite all the difficulties it has to confront, the dam will burst sooner or later.
Markets have revised their views on rate decisions. The Fed will cut rates more slowly than expected, while the ECB will speed up. In general, American exceptionalism gives the Fed time. Its monetary expansion cycle is not as fast as that of its peers, which boosts the U.S. dollar.
Evolution of Fed’s and other central banks’ rates
Source: Bloomberg.
And then there’s Donald Trump with his tariffs! Forex believes import duties will prevent the American currency from flowing abroad, potentially accelerate inflation, and force the Fed to hold rates. That’s excellent news for the U.S. dollar. As the Republican’s ratings improve, investors return to the Trump trade and buy greenbacks.
The revival of trade wars and the associated supply problems will affect markets no less than geopolitics. The news that Israel does not intend to bomb Iranian oil infrastructure facilities led to a fall in black gold, inflation expectations, and Treasury yields.
Previously, investors feared that rising energy prices would accelerate inflation and push the Fed to slow down monetary expansion.
Oil and bond yield evolution
Source: Bloomberg.
EURUSD has declined in 11 of the past 13 trading sessions, partly due to fears of a potential surprise from the ECB. The European Central Bank is expected to cut the deposit rate by 25 basis points to 3.25% at its October 17 meeting. However, the weakness of the eurozone economy, the increased risks of recession, and the region’s return to deflation may require decisive measures from Frankfurt.
Still, there are many “hawks” in the Governing Council. As a compromise, Christine Lagarde may choose a neutral tone at the press conference without giving clues on further easing of monetary policy, which would support the euro.
Trading plan for EURUSD for today
It’s time to buy EURUSD on facts. The pair has long declined on rumors. Will a modest 25-point cut allow us to grab it at a good rate? Short-term buying would be recommended if the euro climbs above $1.0915, but remember to stay cautious in a bearish market.
Price chart of EURUSD in real time mode
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