FX.co ★ EUR/USD weekly summary: the dollar started strong but eventually lost

The EUR/USD pair concluded the trading week at 1.0586, falling just short of the 1.06 level by a mere dozen pips. The closing price almost matches the opening price at 1.0570, despite the week's low being recorded at 1.0449 (with 1.0601 as the high). In general, the pair completed a full circle, essentially returning to a "break-even" point, reflecting how indecisive the EUR/USD bears are. In this case, sellers appear to be the losing side. They couldn't consolidate within the 1.04 level, even though this is a prerequisite for extending the bearish trend. EUR/USD bears have been challenging the 1.04 level for two consecutive weeks now, but the support level at 1.0450 proved to be too strong for them. As a result, the bulls took the initiative and reclaimed nearly all the positions lost during the week.

Part of this was due to the September Nonfarm Payrolls data. The report triggered a mixed market reaction. Initially, the scales tipped in favor of the dollar: the EUR/USD pair fell by almost a hundred pips within an hour, stopping at the level of 1.0483. However, traders subsequently concluded that the "glass is half empty, not half full." In other words, the market focused on the negative aspects (for the greenback) of the report. Most notably, this concerns wages: average earnings increased by 4.2% in September, while the consensus estimate was a rise to 4.3%. While the decline is minimal, there are two nuances here. Firstly, this indicator has been decreasing for the second consecutive month (and has remained in the "red zone" for two consecutive months). Secondly, the September result is the weakest since August 2021.

In this context, it's worth taking note of the core Personal Consumption Expenditures (PCE) Price Index. In August, the indicator came in at 3.9% on an annual basis. This is the slowest pace of growth for the indicator since September 2021. On a monthly basis, the index increased by 0.1% (compared to an expected increase of 0.3%). This is the lowest value of the indicator since July 2022.

Key inflation reports will be published in the US in the upcoming week. We will learn the values of the Consumer Price Index (CPI), Producer Price Index (PPI), and Import Price Index for September. Such data will play a decisive role in the outcome of the Federal Reserve's November meeting. Currently, we can conclude that the previously published reports (Nonfarm Payrolls, core PCE index) allow the Fed to maintain a wait-and-see stance at the upcoming meeting. By the way, the probability of a 25-point rate hike in November is currently only 27% (according to the CME FedWatch Tool). Before the release of the Nonfarm Payrolls, the probability was 35%.

The decline in hawkish expectations has hit the greenback. The ISM indexes only provided temporary support to the US currency. However, there are also drawbacks. For instance, the ISM Manufacturing Index increased to 49, against expectations of a decline to 47.7. But at the same time, the indicator has been below the key 50-point mark since November 2022, indicating contraction. According to representatives of the Institute for Supply Management (ISM), the US manufacturing sector continued to show a trend of contraction last month, albeit at a slower pace.

As for the ISM Non-Manufacturing Business Activity Index, the situation is somewhat different here. The index is above the 50-point target, but in September, it declined to 53.6 (compared to 54.5 in August). According to representatives of the ISM, last month saw a slowdown in the growth of the services sector, primarily due to a deceleration in the growth rates of new orders and employment indexes.

Fed officials also contributed to the mixed fundamental picture. Alongside hawkish statements, there were also cautious theses.

For example, Loretta Mester, the head of the Federal Reserve Bank of Cleveland, stated that the U.S. central bank will likely have to raise rates again this year since the risks to inflation are currently tilted to the upside. She also reiterated the main thesis of the September FOMC meeting, which is that the central bank will have to keep rates at a high level "for a considerable time" to return to 2% inflation. A similar position was voiced by Michelle Bowman, a member of the Fed Board. She stated that she is prepared to support a rate hike decision at the November meeting "if the data released by that time show that progress in reducing inflation has stalled or is proceeding too slowly."

However, the head of the Federal Reserve Bank of San Francisco, Mary Daly, stated that the central bank "does not need to rush with any decisions," considering that "monetary policy is already restrictive, and financial conditions are tight." Some other Fed members, such as Raphael Bostic, the head of the Federal Reserve Bank of Atlanta, and Thomas Barkin, the head of the Federal Reserve Bank of Richmond, also called for "patience."

We can't exactly put all the blame on the mixed economic reports and the equally contradictory statements from Fed officials. But at the same time, these fundamental factors did not help the dollar bulls, including against the euro. The result of this story is predictable: if you don't win, you lose. The greenback eventually lost the initiative and gave up all the gains made during the week. At the end of Friday's trading, the EUR/USD pair returned to the starting point, as it awaits events that will be crucial for the EUR/USD pair.

If US inflation isn't on the dollar's side, sellers will not be able to stay within the 1.05 level. In that case, the pair will likely return to the range of 1.0650 to 1.0750. But if inflation reports please the dollar bulls with "green numbers," the 1.0450 support level, which serves as a kind of "citadel" for EUR/USD sellers, will reappear on the horizon.