EurUsd Weekly Outlook for November 6, 2023 – Markets Poised for December Fed Meeting Amid Inflation Shifts

• The Fed holds rates steady but reignites hopes for those banking on a less stringent monetary policy. Future data will determine the rate direction, but the December FOMC will be crucial for the outlook in 2024.
• The ECB acknowledges that inflation is receding faster than expected. September’s data confirmed that the rate hike efforts have been effective, and we may soon enter a new phase.
• EurUsd quickly climbs towards resistance levels following weak American employment data. The dollar is anticipated to react.

Spotlight on the December Fed Meeting

The Federal Reserve has archived a meeting from which markets expected little – and indeed, that was the case, although Chairman Powell’s remarks have left some room for hope. Hope for the bond market, which saw a notable rebound, distancing itself from the 5% threshold on ten-year maturities for the time being. Hope for equities, which now regard the current discount rate as the likely peak for discounting future earnings. Hope for a weaker dollar after Powell indicated “careful” monitoring of several financial variables, including the effective exchange rate of the greenback.

No word on neutrality was spoken, leaving the prognosis on rates still unresolved. The key is the December meeting, but the statement that “we need to go through a phase of slowed growth and weakening of the labor market” makes it quite clear when the cost of money could plausibly begin to lessen its burden on citizens and the state.

Hence, the upcoming data will need to be followed with extreme attention, also to gauge whether the dollar can muster the strength to aim directly for parity with the euro. However, October’s labor market data showed a significant cooling, appearing to move in the opposite direction. The vigorous rebound of the EurUsd attests to this.

The effective exchange rate of the U.S. dollar has recently hit two standard deviations above the average deviation from its 20-year historical mean – an excess that could lead to substantial profit-taking once U.S. macro data point the Fed towards a less aggressive monetary policy.

Meanwhile, in Europe, inflation slips below 3%, the lowest point since July 2021, with the figure of 2.9% contrasting with September’s 4.3%. Yet, the core figure remains firmly above 4%. This statistical effect of a downsizing should return in the upcoming data, where we will likely see a moderate rise. Certainly, at its December 14 meeting, the ECB can acknowledge that inflation is currently following the predicted return trajectory and consider more expansive measures in 2024. For the euro, parity will hinge on how in sync this decision is with that of the Fed.

EurUsd Technical Analysis: Bearish Trend or Trap?

The crossover of the 100-day moving average from above to below the 200-day moving average by the EurUsd signals that a reversal of the trend is unlikely in the near term. However, last Friday’s rebound has reshuffled the deck.

In 2021, this signal marked the start of a heavy sell-off on the euro. At the beginning of 2023, the upward crossover confirmed the bull market of the single currency; today, it seems once again that the bear has taken control of operations. But it could be a bear trap.

The pullback of the exchange rate in the 1.07/1.08 zone was as rapid as it was predictable. Now, however, the real challenge for the euro begins. It faces a series of resistances to overcome, which would change the scenario once more. Does the European currency have the strength to make this leap?

Technical analysts are eyeing a double top with an internal double bottom for the Dollar Index. Will it come to pass? The two October lows were breached at the week’s close. The upcoming sessions are crucial, but a definitive breakthrough downwards could see a weakness in the greenback persist until December.