Weekly EurUsd Outlook for November 18, 2024 – Rising Volatility and the Looming Risk of Parity

• U.S. markets are hitting record highs repeatedly, setting the stage for a likely correction. Bond yields are rising, and the dollar is undergoing a significant revaluation. This environment, fueled by Trump’s re-election, is further amplified by weakness in other global economies.
• Europe is grappling with Germany’s economic struggles, compounded by upcoming elections in February and an economic downturn threatening the entire Eurozone. The ECB’s potential rate cuts risk deepening the euro’s fragility.
• EurUsd has broken below the 1.08 support level and is now testing 1.05. Should this level also fail, parity between the euro and dollar looms on the horizon.

Trump’s Election Boosts Dollar Amid Eurozone Weakness

There is no doubt that Trump’s election has triggered substantial buying volumes for the U.S. dollar while driving sales of the euro and Japanese yen. Markets anticipate increased domestic investment (reflected in gains for small-cap stocks) at the expense of foreign investments, weighing heavily on European markets already contending with political crises and a steady decline in inflation.

In the U.S., inflation, while in line with expectations, has definitively stopped its downward trajectory. In October, headline inflation edged up to 2.6%, while core inflation held steady at 3.3%. Similar trends are visible upstream in the production chain, with producer prices climbing.

This shift has dampened expectations for significant rate cuts in the U.S., with markets now pricing in no more than 75-100 basis points of easing. In contrast, expectations for substantial ECB rate cuts are mounting, with analysts forecasting Eurozone rates at 1.75% within 12 months. ECB board members consistently underscore the economy’s weakness and moderating inflation expectations during public appearances.

These concerns are justified, given Germany’s ZEW index fell in October, reflecting declines in both current conditions and future expectations. Adding to the uncertainty is Germany’s political landscape, with snap elections scheduled for late February.

Against this economic and political backdrop, the dollar has maintained its strength. Following the 1.08 support break, EurUsd slid easily to 1.05.

Technical Analysis: EurUsd Declines Test Critical Support at 1.05

The euro has recorded eight consecutive weeks of declines, a pattern reminiscent of September 2023. At that time, the 1.05 level provided a springboard for recovery after a 5% drop over two months.

This time, however, the situation appears more precarious. The euro’s best hope of avoiding a further slide may lie in a less dovish stance than expected from the ECB, given recent currency dynamics.

If EurUsd loses the 1.05 support level, a drop below parity in the coming months appears increasingly likely.

Volatility in EurUsd is climbing. After weeks of declines that have pushed the pair from the upper to the lower Bollinger Band, traders are now watching closely to see if the currency pair can hold at dynamic supports that have successfully curbed the dollar’s strength over the past year.

The pace and intensity with which EurUsd is now pressing the lower Bollinger Band are more pronounced than in the previous two instances seen this year. Traders should approach with caution.

While a long position may be tempting at this level, it entails betting against a market that appears well-positioned to continue its downward trajectory.