EurUsd Weekly Outlook for October 2, 2023 – Navigating Central Banks & a Potential Shutdown

• Last week, the U.S. was dominated by shutdown concerns with the risk of halting federal office operations and a potential downgrade in credit rating, severely impacting fixed income securities. The dollar soared.
• Imported inflation, driven by a weak euro and rising oil prices, poses a significant challenge for the ECB, which might be compelled to reconsider its dovish plans to defend the euro, already pressured by the spreads of peripheral countries.
• EurUsd breaks through crucial support levels, moving decisively towards the 1.04 zone, where a reaction is imperative.

Markets Gravitate to Safe Havens

Investors worldwide are carefully watching the Federal Reserve, bracing for potential rate hikes that might steer the U.S. economy precariously close to a pre-recession climate. The rising oil prices, hovering above the $90-per-barrel mark, combined with European gas prices on an upswing, paint a challenging picture. Add to this mix the looming specter of a U.S. government shutdown – a scenario that could freeze public sector operations and cast shadows on U.S. debt’s creditworthiness. This concern has catapulted 10-year bond yields, with 30-year yields nearing the 5% threshold. Given the 2018 precedent where a shutdown persisted for over a month, the recession alarm bells could soon be ringing.

Meanwhile, the Fed’s approach remains one of circumspect caution, holding back on providing market reassurances. This restraint follows the downtrend observed post the FOMC meeting in September. On the other side of the Atlantic, the European Central Bank (ECB) is signaling a potential policy standstill, drawing a stark contrast to its American counterpart. Investors are recalibrating their faith in the euro, factoring in a less-rosy growth forecast in the Eurozone. Existing stresses between peripheral and core bond spreads are re-emerging, exemplified by the Italy-Germany ten-year rate gap reaching a stark 200 basis points.

In historical perspective, U.S. real rates are touching levels unseen since 2008 at nearly 2.25% for a 10-year span. Rates in Germany and the U.K. are following suit, albeit at a more muted pace, while Japan remains steady. The flagging euro strength is stirring up another tempest—import-driven inflation. This, coupled with the escalating prices of key commodities like oil, portends potential consumer price escalations across the Eurozone as 2023 draws to a close.

Technical Analysis – EurUsd at 1.04, the Game Gets Tough

Market trend analysts had previously marked the EurUsd’s potential for a top-end correction, and that prediction seems to have hit the mark. Now, the million-dollar question facing investors is timing their shift from the dollar. Historical data offers some insights. When the EurUsd’s divergence from its 200-week moving average hits the -4%/-5% mark, it typically sounds market alarm bells, reminiscent of trends observed over the past decade. The years 2015 and 2018 serve as case points, with the euro’s trajectory showing marked declines.

But seasoned market watchers argue that the currency landscape might yet have a few twists in store. For EurUsd, the descent might just be in its early stages. Current market movements underscore this narrative, with the EurUsd inching closer to its anticipated target, closely aligning with the Wolfe wave predictions from last week’s commentary. As the 1.041 milestone looms—also marking a significant 50% retracement from the euro’s year-long ascent—analysts await the euro’s strategic response. If trends don’t shift, we could see the currency approach the pivotal 1.02 mark, setting the stage for a watershed moment that could redefine the euro’s bullish journey over the past year.