EurUsd Weekly Outlook for October 16, 2023 – Will the Winds of War Stop the Fed?

• In the U.S., the minutes from the latest Fed meeting suggest a continued hawkish stance by Powell, and a very gradual approach to rate cuts in 2024, contingent on data. Will the war in Israel slow the Fed’s actions?
• Europe watches with concern the outbreak of a new war on its borders. The market believes the ECB won’t raise interest rates at least until the end of 2023.
• The EurUsd bounces off its lows but meets initial resistances, pulling back to 1.05. A corrective scenario still prevails.

The Reasons to Halt Rate Hikes

Tensions in the Middle East hit the world at a time when monetary policy is especially tight due to an inflation that is slowly easing. The release of the minutes by the Fed confirmed the U.S. central banks’ inclination to bump up the money cost by another 25 basis points, even in an economically uncertain climate, is now exacerbated by the war in Israel. The dot plots also indicated that if there are cuts in 2024, they will be modest (50 basis points), half of what had been projected three months earlier.

If monetary policy remains cautious, but perhaps on hold given the recent war developments, the risk of an expanded conflict in the Middle East has renewed interest in gold and also supported the dollar. The market is hoping for a more dovish stance from the Fed in the upcoming meeting, but inflation remains a challenge. U.S. inflation rose by 3.7% in August and 4.1% in the core rate, confirming that the deceleration in consumer prices has, for now, halted. The Fed’s work isn’t over. Meanwhile, producer prices are also on the rise, with a 2.2% annual increase in the general data and 2.8% in the core.

Europe too seems to be entering the final phase of rate hikes, barring sudden spikes in the core inflation data. Bloomberg’s WIRP function, which estimates the probability of rate hikes in the Eurozone, doesn’t anticipate tightening by the ECB in December. However, the emerging crisis in Israel could make the path to economic recovery even more uncertain.

EurUsd Technical Analysis – The Bounce Fizzled Out Quickly

The outbreak of tensions in the Middle East allowed the euro to catch its breath temporarily with a noteworthy bounce, challenging the initial resistances but no more. Even if successful in breaking the downtrend line, for EurUsd, the significant hurdle would still loom around 1.075, where the moving average has provided solid support during the euro’s bull market. This support may now turn into an equally formidable resistance. The key level to watch now is the 1.04 support.

The Dollar Index chart, which measures the strength of the greenback against a diverse basket of foreign currencies, retraced after an almost uninterrupted rise since July. This is attributed to typical profit-taking, but buyers were quick to step in, thanks to Middle Eastern tensions favoring a flight to quality. The Dollar Index has thus approached its first support level from March 2023 and the 20-day moving average, without much success. Only a decisive downward break would pave the way for a more substantial decline of the greenback towards the highs of May at 104.7.