FX.co ★ EUR/USD: Fed rushes to rescue: dollar gradually regains positions

After a sharp spike to the level of 1.0757, the EUR/USD pair is slowly but steadily sliding downwards. Buyers failed to gain a foothold within the 1.07 range to test the next resistance level at 1.0800 (the upper boundary of the Kumo cloud on the daily chart).

It is worth noting that the overall fundamental background for this pair had anticipated a price increase to the 1.08 range, primarily due to the easing of hawkish expectations regarding the further actions of the Federal Reserve. The October Nonfarm Payrolls, published last Friday, dealt a serious blow to the positions of dollar bulls. The probability of a rate hike in December dropped to 9% and in January to 14%.

At the same time, the likelihood of a 25-point rate cut in the spring (at the May meeting) increased to nearly 50%. This marked a significant turning point because, while most Fed members agree with maintaining the status quo, they did not take the dovish expectations lightly. Therefore, the dollar received support from an unexpected side, namely from Federal Reserve representatives who hurried to reassure traders that high interest rates are here to stay.

It's also important to note that the economic calendar for the current week for EUR/USD is almost empty, with mainly secondary reports being published. However, this week is rich in appearances by Federal Reserve representatives. Some already gave speech this week, and many more will speak today, tomorrow, and the day after. For example, Fed Chairman Jerome Powell will speak twice—once today (although today's speech will be ceremonial at the opening of the Bureau of Labor Statistics conference) and the second time tomorrow, participating in a discussion at the Jacques Polak Conference. Powell will also likely provide support to the dollar by refuting the central bank's intention to ease monetary policy in the first half of next year.

The representatives who have already spoken this week have noted the strong growth of the U.S. economy in the third quarter (at 4.9%) and have raised the hypothetical possibility of further tightening of monetary policy. In particular, Dallas Fed President Lorie Logan stated that inflation is trending closer to three percent rather than the target level. She also pointed out that long-term Treasury yields have fallen, while the increase in yields played a significant role in the Fed's decision to keep rates unchanged in November (rather than raising them by 25 basis points).

As for the October Nonfarm Payrolls, Logan admitted that the labor market is cooling but remains very tight. It's worth noting that the Dallas Fed President (who has voting rights this year) did not directly announce another rate hike, but she did emphasize that the rate will remain high for as long as necessary.

Federal Reserve Governor Michelle Bowman, who also has voting rights on the Committee, voiced more categorical messages—that the central bank will likely need to raise the federal funds rate further.

On the other hand, Federal Reserve Governor Christopher Waller was more cautious in his assessments and forecasts. According to him, the explosive growth of the U.S. economy in the third quarter requires very close attention when discussing further actions. However, Waller also noted that the rate will remain high "as long as necessary" in any case.

It can be assumed that Fed Chair Powell will also attempt to smooth things out—on the one hand, he will refute the Fed's intention to lower the rate early next year, and on the other hand, he will not announce a rate hike in December or January (as the decision will depend on incoming data). After the November meeting, Powell only mentioned that the question of easing the pace of asset purchases was not discussed (although he added that it is still too early to discuss this issue). However, after the November meeting, the likelihood of a rate cut increased to 50%, so the Fed Chairman may slightly toughen his rhetoric this week to "put out the fire" and reduce the market's dovish sentiment regarding the Fed's actions in early 2024.

The nearest support level for the EUR/USD pair is located at 1.0620, which is the lower boundary of the Kumo cloud, coinciding with the Tenkan-sen line on the daily chart. If bears push this target lower (in case Powell becomes an ally of the greenback), the next targets for the downward movement will be at 1.0600 (middle Bollinger Bands line on D1) and 1.0550 (the lower boundary of the Kumo cloud on the four-hour chart).