EUR/USD: Lower rates in the US by the end of the year?

Over the past 2 weeks, currency traders have had to contend with significant volatility regarding the probability of a federal interest rate cut on 10 December, following the Fed's final monetary policy meeting of the year. Fluctuating wildly from 65% to 33%, and then to over 69% today, the probability of a 25 basis point cut in the dollar's value, as measured by the CME Group's FedWatch tool, has been rising sharply as uncertainty surrounding the state of private-sector employment in the United States has cleared, and depending on the tone of statements made by senior officials at the powerful Washington-based monetary institution.

The most recent notable intervention, or at least one that aligned with market sentiment, came from John Williams, one of the voting members of the Federal Reserve (Fed) this year, who suggested there was "room" for another short-term interest rate cut before the meeting scheduled for December.

"I continue to see room for a further short-term adjustment" to key interest rates, he said. Investors are therefore regaining hope for another Fed rate cut next month.

The euro, one of the most reliable barometers of risk appetite in financial markets, gained a few pips against the dollar, maintaining a bearish bias in both the short and medium term.

As a reminder, markets were focused on Thursday's release of the October Non-Farm Payrolls (NFP) report, which confirmed a deterioration, albeit much less severe than expected, in the health of private-sector employment in the United States. While the unemployment rate rose to 4.3% of the workforce, the number of jobs created, which had plummeted in August, rebounded to 120,000. This economic health report, the contents of which we will never know for November due to the government shutdown, is a crucial basis for the Fed in designing its monetary policy strategy.

"The September US jobs report significantly exceeded consensus forecasts and should help to ease investor concerns about a stagnant labor market. Although the data is somewhat dated, it provides an important piece of information that will inform the Fed's overall assessment of the health of the labor market. It appears that the job market has begun to stabilize as we approach autumn, which should vindicate Fed members who favor a hawkish policy*, who have consistently argued that it is prudent to wait for more data before making further rate cuts," comments Jeff Schulze, head of economic and market strategy at ClearBridge Investments, the day after the NFP report was released. This raises the possibility of a 25 basis point cut in December followed by a prolonged pause...

In the immediate term, currency traders have just received the Ifo Business Climate Index for Germany, the largest economy in the Eurozone. The indicator edged down slightly to 88. The economic cycle matrix indicates a confirmed trajectory from the "Crisis" phase to the "Recovery" phase.

Right now, the EUR/USD is trading at $1.1523.

KEY TECHNICAL ELEMENTS
The upward trendline that had prevailed until now (in black on the chart) has now been broken, with a confirming pullback. A negative outlook is suggested below this trendline, while the Relative Strength Index (RSI) is collapsing. 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.

* Restrictive, belligerent, as opposed to dovish (accommodative).

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

Our entry point is $1.1537. The price target for our bearish scenario is $1.1013. To protect your capital, we advise placing a stop-loss order at $1.1639.

The expected profit for this forex strategy is 524 pips, and the potential loss is 102 pips.