Weekly EurUsd Outlook: U.S.-Europe Growth Gaps Weigh Heavy; A Closer Look at Interest Rates

• The U.S. appears impervious to rising interest rates, bolstered by improving economic data. The Fed’s task is far from complete, and the dollar continues to benefit.
• Europe braces for this week’s ECB rate decision amidst a slew of data confirming an economic slowdown in the Old Continent and the consequent euro weakness.
• EurUsd has broken through key support levels and now seems poised for more ambitious bearish targets. A rebound above 1.08 would reinvigorate the euro.

Fed’s Dilemma Intensifies as Markets Eye ECB Meeting

The Federal Reserve is finding itself in an increasingly tangled web as it navigates a complex economic environment. Despite one of history’s quickest monetary tightening moves, the U.S. economy is showing scant signs of fragility. Rather, it’s picking up steam, as recent ISM services data indicates, especially in the price and employment sub-indexes.

In the unending skirmish against inflation, the Federal Reserve appears to be adopting a wait-and-watch strategy. Market experts anticipate no immediate hike in interest rates, but the central bank is likely to keep them elevated for an extended period. This caution has sent ripples through both the remarkably resilient U.S. stock market and its more skittish bond market counterpart.

Meanwhile, the U.S. dollar is holding its own. A recent Reuters poll revealed a bullish sentiment among financial analysts, with 80% expressing optimism about the dollar’s trajectory.

Across the Atlantic, Europe presents a contrasting picture. Italy registered a downturn in the second quarter, while Germany’s economy teeters on the edge of an unusual recession. Pessimistic leading economic indicators suggest that Germany’s third quarter isn’t likely to offer a turnaround, underscoring the nation’s increasing reliance on China’s economic fortunes. Germany, once the engine of European growth, is increasingly seen as the caboose.

As the European Central Bank (ECB) gears up for its crucial meeting this week, no rate changes are expected. ECB President Christine Lagarde faces an uphill battle dealing with lukewarm market sentiment and a flagging euro—a sign that some market participants are wondering if the ECB will pause its tightening cycle.

Technical Analysis – Changing Currents in the EurUsd Market

The EurUsd currency pair has decisively moved past its 200-day moving average, but skepticism persists around the strength and sustainability of this bearish trend. The Average Directional Index (ADX), a key measure of trend strength, has yet to cross the significant 30-point threshold that typically signals a strengthening trend. The last time this happened was at the end of the previous year, which gave the euro a bullish push. A less-than-convincing signal in June 2023 highlighted the ongoing volatility and uncertain trading range.

The immediate challenge for the EurUsd is breaching the 1.061 level, also the 38.2% Fibonacci retracement level from its earlier rise. Failing to do so makes a slide to parity increasingly likely—an outcome the ECB would undoubtedly prefer to avoid.

Technical analysis employing Bollinger Bands confirms the evolving dynamics of the EurUsd market. The currency pair has frequently hovered near the lower band in recent trading sessions, mirroring its behavior earlier this year. For the euro to mount a recovery, it will need to register a ‘divergent bottom,’ a technical indicator that suggests a potential trend reversal.

Currently, such a reversal is not in sight, but this represents only the initial phase of technical indicators. For a true reversal to gain credibility, the currency pair will need to break above its central line—specifically, moving above 1.08, which aligns with its current 200-day moving average.