Weekly EurUsd Outlook for August 26, 2024 – Dollar Freefall Amid Powell’s Rate Cut Signal

• The time for a rate cut in the US has arrived, as declared by Powell at Jackson Hole, leading to an immediate reaction from the equity and bond markets (upward) and currency markets (downward, with the dollar taking a hit).
• The Eurozone continues to struggle, with Germany unable to bounce back. Another rate cut from the ECB is expected in September, with a focus on upcoming inflation data.
• The EurUsd has broken through the critical resistance at 1.10, reaching the 1.12 zone, the last resistance before a definitive bullish rally as the euro is buoyed by the unwinding of long dollar positions ahead of the expected rate cut.

Powell’s Jackson Hole Signal Fed Rate Cuts Spark Market Rally and Political Tensions

Markets cheered Powell’s words at Jackson Hole. The world’s most influential central banker announced that the Fed is ready to cut interest rates in the United States. Inflation, which is expected to converge toward the 2% target by 2025, and a cooler-than-expected labor market, following a downward revision of over 800,000 payrolls from April 2023 to March 2024, pushed Powell to make this significant statement. The market is now pricing in a 25-basis-point rate cut from the Federal Reserve, a process expected to continue in the months leading up to the last official meeting before the presidential elections in early November. The Republican political side sees these statements as an electoral gift to Kamala Harris, sparking controversy.

In Europe, the rate situation also seems to be tilting toward another cut. Despite preliminary inflation data showing a slowdown in the return to the 2% target, macroeconomic numbers reveal a rather sluggish economy in the Old Continent. Germany, in particular, appears to be a burden on the Eurozone, with composite PMIs showing lower figures than in the US, Japan, the UK, and Australia. Lagarde and the ECB should have little doubt about their next moves.

Technical Analysis: EurUsd Breaks Key Resistance

EurUsd has successfully breached the 1.10 resistance area, which we had identified as critical for initiating a significant bullish movement. As predicted, the market quickly adjusted to the 1.12 zone, the last bastion before a much more substantial rally that could push the greenback to the 1.16-1.17 area in the first instance. The overbought condition reached by EurUsd in recent days might attract buyers of the US currency. The dollar’s ability to recover will reveal the quality and strength of the euro’s bullish movement in the coming months.

The weekly chart leaves little doubt. The weekly head and shoulders pattern was confirmed with the definitive break of 1.09, and the market immediately moved close to the last hurdle at 1.127, represented by the highs of July 2023. The entire EurUsd downtrend that began in 2008 also passes through the 1.13 area, positioning this technical threshold as the most crucial level for the coming weeks. Breaking beyond this level would open much more interesting bullish prospects for EurUsd than those that have characterized a long and exhausting trading range so far.