FOREX Fundamental analysis for EUR/USD on September 18, 2024
The impact of the rate on the economy cannot be overestimated. Many analysts believe that the Fed should lower the federal funds rate by 50 basis points, believing that the Fed has delayed the start of monetary policy easing too long and now must quickly close the gap between the rate and the yield of 2-year treasury bonds. The US economy is either already heading for recession or is very close to it, and high real rates only accelerate this process — this is the position of the "bulls" for the EUR/USD pair, and it finds support.
Whatever step the Fed takes, it will inevitably cause a wave of criticism. If the rate drops by 25 bps, many will blame the Central Bank for bringing the economy into recession. If the rate drops by 50 bps, there will be concerns about a new round of inflation.
There is also a risk that a too sharp decrease of 50 bp will not only disperse the volatility of currency pairs, but also cause market panic and fear. This may seem like an admission that a recession is near. Such a step can be perceived as an attempt by the Fed to correct its own mistakes.
From my point of view, a more reasonable option is to start with a decrease of 25 bps. Although inflation is slowing down, it is still far from the target level, and the cooling of the labor market may simply be a return to a pre-pandemic state. Despite signs of a slowdown, the American economy remains strong — this is confirmed by positive data on retail sales and industrial production, as well as a forecast for GDP growth of 3% in the third quarter.
The Fed can simultaneously cut the rate by a quarter point and signal its readiness to accelerate the decline if the economic situation worsens. It is important to note that investors will pay attention not only to the first step, but also to the FOMC forecasts, since there are only three meetings left until the end of the year.
At the same time, markets have overlooked the weakness of competing economies such as China and Germany, as well as the fact that U.S. assets remain more attractive.
If the Fed cuts the rate by 25 bps and forecasts a decrease of 75 bps in 2024, we will get conditions for selling EUR/USD, although Jerome Powell's statement about the possibility of a faster decline may cause a short-term growth of the pair. However, if the Fed starts at 50 bps and forecasts show a cumulative decline of 100 bps, then we are waiting for a EUR/USD rally, followed by a return to sales below 1.1155 after Powell's press conference, where he will probably try to smooth out the impact of this step.
EUR/USD Technical analysis
EUR/USD remains in a short-term downtrend. This week, market participants tested the resistance area 1.1140 - 1.1128. But this zone is held by sellers. Therefore, from here we will look for sales when appropriate signals appear with the first target at 1.1071 and then in the 1.1002 area.
If the resistance area is broken up during trading and the American trading session closes higher, then the short-term trend will change to an upward one. In this case, starting from the next trading day, we will consider buying a pair with a target in the area of the upper target zone 1.1140 - 1.1128