FOREX Fundamental analysis for EUR/USD on August 5, 2024
To know where to fall, I would lay a straw. If Jerome Powell had received important statistics earlier, he would have lowered rates at the July FOMC meeting, which. EY Parthenon calls it a "missed opportunity." Moody's argues that a 25 basis point rate cut in September will not be enough. The Fed should cut the rate by 50 basis points to demonstrate its determination to ease monetary policy. This will hit EURUSD sellers.
Over the past two years, the Fed has continuously battled inflation and avoided easing policy in order to prevent prices from rising again. But after disappointing statistics on the US labor market, the situation has changed. Investors are wondering if the Fed's pause has stretched too long. The rise in unemployment to an almost three-year high of 4.3%, a slowdown in wage growth to 3.6% and the most modest increase in employment of 114,000 since the pandemic, with the exception of April 2023, have raised fears that a soft landing is becoming unattainable and the economy is heading for recession.
According to Goldman Sachs, the probability of an economic downturn in the next 12 months has increased from 15% to 25%. Citigroup and JP Morgan predict that the federal funds rate will decrease by 125 basis points by the end of the year — the Fed will reduce it by 50 basis points at two of the three remaining meetings and once by 25 basis points. The futures market agrees with this scenario - the probability of policy easing by half a point in September increased from 26% to 81%.
The Fed's policy is really starting to look overly harsh. The gap between actual rates and the rates corresponding to the Taylor rule linking inflation and unemployment has peaked since 2020. If they don't match up soon, the likelihood of a recession will skyrocket. Moreover, the inverted yield curve foreshadows an economic downturn in the United States.
The Sahm rule also indicates the threat of recession. If in three months the average unemployment rate rises by 0.5% or more from the annual minimum, the economy is in recession. In the USA, this figure is 0.53%.
Recession fears allow markets to hope that the Fed will aggressively cut rates. This will allow the EURUSD to rise above 1.09. But should the bears panic? According to the theory of the "dollar smile", the greenback is strengthening as the recession approaches. In addition, the weakness of the economy reduces the chances of Democrats in the elections, and the Trump factor will support the USD index.
Of course, the risks of EURUSD continuing to grow towards the levels of 1.1015 and 1.111 remain, but the potential for an upward movement looks limited. Nevertheless, for now we keep the longs open from the area of 1.079-1.08.
EUR/USD Technical analysis
On Friday last week, EUR/USD adjusted to the key resistance of the short-term downtrend of 1.0916 - 1.0903. Today, buyers tried to break through this zone, but before the European trading session, the pair returns to resistance. Apparently, the sellers managed to hold the area and seize the initiative. Therefore, when appropriate signals appear, we will consider the formation of short positions with the first target of 1.0846 with the prospect of a decrease to the minimum on August 1 - 1.0777. If EUR/USD consolidates below the August 1 extreme, then the next target will be the lower Target zone of 1.0696 - 1.0670.
If the resistance area 1.0916 - 1.0903 is broken up and the daily candle closes higher, then the short-term trend will change to an upward one. In this case, starting from Tuesday, it will be possible to consider purchases of the pair from the main one in the direction of the upper Target zone 1.1054 - 1.1029.