EurUsd Weekly Outlook for February 5, 2024 – Fed Holds Rates Steady, Eyes on ECB for Spring Cut

• The Fed holds firm on rates, confirming that cuts will come in 2024 but only when the perception of inflation being under control is concrete. Markets were disappointed by Powell’s words, who appeared a bit more hawkish, and the employment numbers seem to justify his stance.
• The ECB is poised to reduce the cost of money before the United States after the release of stagnant economic data and inflation still in moderate deceleration.
• EurUsd remains on the 1.08 support level, driven by a widening interest rate differential. However, the battle has not yet materialized the much-anticipated sell signal.

Federal Reserve Maintains Rates, Market Eyes Future Cuts Amid Global Economic Signals

The Federal Reserve has confirmed its decision to keep interest rates unchanged, as expected, within the range of 5.25% to 5.50%. Since July, the Fed has halted rate hikes, leading to a general downturn in the yield curve and fueling hopes in the stock markets that have since reached new highs. The final statement removed any reference to further tightening, but it is not certain that the much-anticipated cut will happen in March. Powell has cooled market enthusiasm by stating that until inflation is back on a solid 2% path, any hypothesis of reducing the cost of money is premature.

While a rate cut is expected, it’s too early to say when, especially with the booming January job data (over 300,000 new payrolls) surprising analysts and seriously questioning the short-term possibility of the Fed intervening on the cost of money in such a tight labor market. Nonetheless, the dollar has benefited in a week where significant data from the Eurozone also emerged, confirming an economic slowdown but also a modest resurgence of inflation in Spain and Italy. Markets estimate that Lagarde will cut the cost of money, especially in light of the confirmed German recession and stagnation in the fourth quarter GDP data. A 25 basis point cut is expected as early as April, which is why EurUsd continues to test significant support levels around the 1.08 area.

Technical Analysis: EurUsd Challenges the 1.08 Support, Dollar Index Shows Technical Resilience

EurUsd is once again pressing on the fundamental supports of the 1.08 area. For now, the market is attempting, and undoubtedly, the pressure on the 200-day moving average is increasing, and a breach could open the door to a potential extension first towards 1.05 and then 1.02. Graphically, it’s evident how this technical threshold represents a critical watershed of EurUsd’s very wavy movement in recent months. The market ventured an extension in December when it seemed the ECB was more hawkish than the Fed on rates, only to reverse everything in recent weeks.

The Dollar Index has taken on a textbook configuration of technical analysis. The precision with which the dollar has tested and then rebounded off the 200-week moving average shows how technical the market is today. In July, for two consecutive weeks, DXY touched the moving average before vigorously rising. The dive down again at the end of 2023 before a weekly hammer pattern lifted the greenback, which historically in February remains a currency appreciated by traders and likely to rise a bit more before entering a seasonally more complicated period for the dollar.