Dollar Skyrockets, Rate Speculation Clouds Market Outlook
EUR/USD Holds 1.0500 Support as RSI Signals Bounce
Since Donald Trump’s win in the U.S. Presidential race, the dollar has been skyrocketing but the last few days have been filled with rate cut noise and speculation. Since Election Day, the US Dollar Index (DXY), which measures the dollar’s strength against a basket of 6 major currencies, rose from 103.50 to a high of 107.06. During the same time, EUR/USD dropped from 1.0930 to 1.0500, to levels last seen in October 2023.
But with inflation still above the 2.0% target, the chances of another 25 bps rate cut are starting to dim. At the time of writing the probability of a cut is 62%, with the rest of 38% reserved for a no-cut scenario, according to CME’s FedWatch tool.
Economic data released last week was better than expected overall, which prompted Fed Chair Powell to be less hawkish about rate cuts. Going forward, it’s likely that rate speculation will affect the currency markets. The Fed will keep a close eye on economic indicators, which means that data releases will have a greater impact than usual.
Economic Calendar Highlights
The G20 Meetings will take place Monday and Tuesday. While the “Group of 20” is not an institution, their decisions and discussions can influence the currency markets. Wednesday at 9:00 am GMT the ECB will release the Financial Stability Review, followed at 1:00 pm GMT by a speech delivered by ECB President Christine Lagarde.
Friday will be the busiest day of the week, starting at 7:00 am GMT with the release of the U.K. Retail Sales. The French Manufacturing and Services PMIs will be released at 8:15 am GMT and followed at 8:30 am GMT by the same indicators for the German economy.
UK’s Manufacturing and Services PMIs will come out at 9:30 am GMT and the final release of the week will be the US Manufacturing and Services PMIs, scheduled for release at 2:45 pm GMT.
Technical Outlook – EUR/USD
The pair is currently trading in very close vicinity to the support at 1.0500. Considering the importance of this level and the length of the last move, we can expect to see a bounce up from here.
The Relative Strength Index (RSI) is oversold and it shows bullish divergence: the indicator is making a higher low but the price has already made a lower low. We already saw that the price reacted when it hit 1.0500 late last week; however, the bearish pressure was high and most of the gains were erased.
This bearish pressure/momentum is likely to subside soon, at least enough to allow a retracement to happen. After the divergence is cleared, the dollar bulls are likely to step in again but this will also depend on the U.S. rate path.
