The EUR/USD pair is currently in a bearish consolidation phase following a significant drop last week to the mid-1.0900s. The US Dollar has maintained its post-NFP gains to a multi-week high, limiting the upside potential for the pair. Concerns about another potential rate cut by the ECB in October are weighing on the Euro and acting as a headwind for the pair.
Starting the new week on a subdued note, the EUR/USD pair is consolidating last week’s heavy losses to its lowest level since mid-August, following positive US employment data. The pair currently trades around the 1.0975 region and remains vulnerable to further declines from its recent pullback from a 14-month top above 1.1200.
The USD has strengthened to a seven-week high as investors reduced their expectations for a significant rate cut by the Federal Reserve in November. The positive US jobs data, which showed the economy adding 254K jobs in September and a decline in the Unemployment Rate to 4.1%, has led to concerns about inflation and reduced hopes for aggressive monetary policy easing. This has supported the USD and weighed on the EUR/USD pair.
Market indicators suggest a high probability of a 25 basis points rate cut by the Fed at the November policy meeting. Geopolitical risks and ongoing conflicts in the Middle East have also boosted the USD Index (DXY) against a basket of currencies, adding further strength to the US Dollar. Meanwhile, the Euro has been under pressure due to expectations of another rate cut by the ECB in October, driven by weakening economic growth and inflationary pressures.
Comments from ECB Governing Council member Francois Villeroy de Galhau have reinforced expectations of a rate cut in October, citing weak economic growth as a reason to take action to prevent inflation from falling below the 2% target. This has added to the headwinds facing the EUR/USD pair and suggests a potential further decline in the short term. Any recovery attempts may be viewed as selling opportunities, with a risk of losing momentum quickly.
The Federal Reserve (Fed) plays a crucial role in shaping monetary policy in the US, with a dual mandate of achieving price stability and fostering full employment. The Fed adjusts interest rates to achieve these goals, raising rates when inflation is high and lowering them when inflation is low or unemployment is high. Changes in interest rates affect the value of the US Dollar, making it more attractive to international investors when rates are raised.
The Federal Reserve conducts eight policy meetings a year, where the Federal Open Market Committee (FOMC) makes decisions on monetary policy based on economic conditions. The FOMC consists of twelve Fed officials, including members of the Board of Governors and regional Reserve Bank presidents. In extreme situations, the Fed may implement Quantitative Easing (QE) to increase credit flow in the financial system, a policy used during crises to stimulate the economy.
Quantitative Easing (QE) involves the Fed buying high-grade bonds from financial institutions using newly printed Dollars, which can weaken the US Dollar. Quantitative Tightening (QT) is the reverse process, where the Fed stops buying bonds and allows maturing bonds to expire without reinvestment, which can strengthen the US Dollar. These policies influence the value of the US Dollar and impact currency pairs like EUR/USD.
