FOREX Fundamental analysis for EUR/USD on September 20, 2024
The central banks of the world did not follow the example of the US Federal Reserve, which, combined with the increased risk appetite of investors, shook the dollar's position in forex currency trading. Although the market initially reacted sluggishly to the reduction in the federal funds rate by 50 basis points to 5%, soon stock indexes such as the S&P 500 rushed to new heights, and the EUR/USD pair began to move towards the 1.12 mark. The rhetoric of Fed Chairman Jerome Powell initially slowed down assets, but the next day inspired investors who saw in his speech the conditions for balanced economic growth.
The Bank of England has been cautious, deciding not to rush into monetary policy easing in order to keep inflation low. Other countries such as Norway, Taiwan, Turkey and Japan also left their rates unchanged, and Brazil even raised the cost of borrowing. Against the background of the Fed's actions, this gave the EUR/USD bulls an additional impetus to attack, despite the fact that many expected other Central Banks to follow the American regulator.
The uneven pace of monetary policy easing, and in some cases, its discrepancies, such as in Brazil and Japan, creates conditions for a weakening of the dollar against world currencies. At the same time, the increased global risk appetite undermines the position of safe haven assets. Investors are now demanding even more easing — they expect the Fed to cut the rate by 70 basis points by the end of 2024, which exceeds the forecasts of the Open Market Committee (FOMC).
What's next? Goldman Sachs assumes a gradual rate cut of 25 basis points at each meeting from November to June, while JP Morgan considers the likelihood of a more aggressive move in November – once again by 50 bps. Everything will depend on the state of the labor market, which, according to the Fed forecasts, should remain stable despite a slight increase in the unemployment rate. This suggests that the regulator is confident that inflation is under control, and is now focused on preventing a serious cooling of the economy.
It is noteworthy that the employment data may also present surprises: the number of applications for unemployment benefits has reached its lowest level since May. The Fed is striving for a "soft landing" of the economy, although it would be more accurate to call it normalization after overheating. A slowdown in GDP growth, a return of inflation to the 2% target and stable low unemployment are what the current policy is leading to. The only "abnormal" factor remains the high rate of 5.25%, which the Fed has begun to gradually reduce.
The refusal of Central Banks to follow the Fed and the improvement in global risk appetite create favorable conditions for purchases of EUR/USD at the breakdown of the resistance of 1.118. Nevertheless, we believe that short-term growth will be replaced by a decline.