EUR/USD: the FED's intentions - doubts remain

After a strong rebound fueled by the solid performance of the CAC and DAX this week, amid relief following the end of a historically long government shutdown, buying and selling pressures on the EUR/USD have once again become balanced. The currency pair is currently experiencing resistance at its 50-day moving average (in orange), a long-term trend line that has been gradually declining since mid-August, as the market loses confidence in the prospect of another federal interest rate cut in December.

"The government shutdown has heightened economic uncertainty and dampened the spirits of Americans. Last Friday, the University of Michigan reported that 71% of respondents expect unemployment to rise next year, a level not seen since 1980," says Greg Kounowski, Investment Advisor at Norman K.

And American morale is directly linked to consumer confidence, as consumption remains structurally the primary driver of economic growth in the United States.

"While the US economy is expected to recover most of its losses quickly, the question now is whether the recent economic damage is due to the temporary effect of the government shutdown or whether it reveals deeper problems. Uncertainty persists, and the White House press secretary indicated that employment and consumer price data for October will likely never be released."

For now, the market is still narrowly favoring the scenario of another 25 basis point cut in federal interest rates following next month's FOMC meeting, but this is far from a done deal. The probability has dropped from 66% last week to 55.1% according to the CME Group's FedWatch tool.

It's worth recalling that the August Non-Farm Payrolls (NFP) report highlighted a significant deterioration in the US job market. And since then, we've only had very incomplete snapshots of its health, thanks to ADP and Challenger.

Investors are rattled by several statements from members of the US Federal Reserve (Fed). "Yesterday, several Fed representatives spoke, adopting a cautious tone regarding the outlook for monetary policy," says Deutsche Bank.

"For example, San Francisco Fed President Mary Daly indicated that she was keeping an 'open mind' regarding the December decision. Cleveland Fed President Beth Hammack stated that 'we are facing persistently high inflation' and that bringing inflation 'back to 2% is essential for our credibility, and that is our objective,'" the bank listed.

On today's economic data front, currency traders took note of the very first Eurostat estimates of GDP growth in the Eurozone in Q3, at +0.2%, which is perfectly in line with market expectations. The September trade surplus, also for the Eurozone, was a pleasant surprise, coming in well above consensus at 18.6 billion euros.

Right now, the EUR/USD is trading at $1.1634.

KEY TECHNICAL ELEMENTS
The upward trendline that had prevailed until now (in black on the chart) has been broken, with a confirming pullback. A bearish outlook is suggested below this trendline, as the Relative Strength Index (RSI) collapses. The 20-day moving average (in dark blue) has just broken significantly below its 50-day counterpart (in orange). The gap between these two technical indicators is widening, while the RSI has been in a marked downward trend since mid-September.

MEDIUM-TERM FORECAST
Based on the key technical factors mentioned above, our medium-term outlook for the EUR/USD is bearish.

Our entry point is $1.1617. The price target for our bearish scenario is $1.1203. To protect your invested capital, we advise you to place a stop-loss order at $1.1701.

The expected profit for this strategy is 414 pips, and the potential loss is 84 pips.