Weekly EUR/USD Outlook – September 23, 2024 – Fed’s Surprise Rate Cut

• Inflation doesn’t seem to be the pressing issue; preventing a recession is. The Fed has delivered a surprising 50 basis point rate cut, a move seen only three times since the 1970s under exceptional circumstances. Now, all eyes turn to the upcoming November election showdown.
• Germany remains in the economic doldrums, with both the ZEW expectations and current conditions indices slipping, likely confirming a second consecutive quarter of recession for what was considered Europe’s economic powerhouse just a few months ago.
• The EUR/USD has stabilized below the 1.12 resistance level following the Fed’s announcement, suggesting that the dollar’s weakness had already been largely priced in by the markets.

Fed’s Aggressive Rate Cuts Spark Debate as Economic Uncertainty Grows

In alignment with bond market expectations, the Fed acted swiftly with a substantial 50 basis point rate cut, possibly aiming to make up for lost ground in August. The market now anticipates two additional 25 basis point cuts in the year’s final two meetings, scheduled after the Trump-Harris election event. Official rates now stand in the 4.75% to 5% range.

The Fed’s projections place the federal funds rate between 3.25% and 3.5% by the end of 2025—higher than market forecasts but significantly lower than the previous projection of 4% to 4.25%. With inflation expected to return to 2.2%, Fed Chair Jerome Powell is closely watching the labor market, which has seen unemployment rise by half a percentage point over the past year alongside sharp downward revisions in payroll numbers.

Naturally, analysts are divided. Why cut rates so aggressively if the economy, as data suggests, is still on solid growth tracks? What does the Fed know that we don’t? And is inflation truly under control? These are questions that only upcoming data can answer as the Fed aims for a soft landing. Meanwhile, gold is rallying to new highs, and the dollar continues to consolidate the losses accumulated in recent weeks.

In Europe, there’s little news of note apart from the continued weakness of the German economic cycle, highlighted by the ZEW index. Expectations are declining, and current conditions are also worsening. The German GDP contracted in the second quarter and may do so again in the third.

Technical Analysis: Rare Fed Cuts and Ongoing Dollar Weakness

Instances of 50 basis point rate cuts marking the start of an expansionary monetary policy phase are rare in the Fed’s post-1970s history. The only comparable moments were in 1987, 2001, and 2007—each time under very different circumstances: Black Monday on Wall Street, the bursting of the tech bubble, and the housing crisis. This time, however, there seems to be no financial trigger for Powell’s decision, which had partly been anticipated by the dollar.

Technically, there still doesn’t appear to be a case for long dollar positions, with the Dollar Index needing to retreat another 4-5% to hit significant long-term support levels.

Looking at the EUR/USD pair, it’s clear how crucial the recent levels around 1.12 have been. Even after the latest FOMC meeting, these resistance levels have managed to contain the euro’s strength. Internally, the eurozone’s own economic weaknesses are still present, giving markets little reason to buy the euro and break past these resistance points definitively.

For now, a retreat to the 1.10 area remains an attractive entry point for increasing long EUR/USD positions, with a close and reversal below 1.09 as the critical downside trigger.