EUR/USD: ECB Lowers Rates, Markets Bet on December Cut

The euro has lost nearly 2.8% against the US dollar in October as market participants priced in more rate cuts in the Eurozone. Although the central bank failed to give guidance on the future, markets are betting on another cut in December.

EUR/USD Technical Analys

The 4-hour chart shows a solid downtrend, with the price trading below the 22-SMA and the RSI below the pivotal 50 line. Moreover, the RSI has dipped into the oversold region several times during the downtrend. This is a sign that bearish momentum is strong.

After a brief consolidation at recent peaks, bears took charge by breaching and staying below the 22-SMA. However, a new bearish trend was confirmed when the price broke below the 1.1001 support level. From there, EUR/USD started consistently making lower highs and lows. The price broke below the 1.0900 support and has currently paused near the 1.0825 level.

At this level, market participants will wait for more catalysts. If economic data shows weakness in the Eurozone, rate cut expectations will increase, weakening the euro. If bears continue with the same enthusiasm, the price might only revisit the 22-SMA before making a new low below 1.0825.

On the other hand, a longer pause due to an unclear outlook will allow the price to retest a higher resistance at 1.0900 before continuing the collapse. Nevertheless, the bearish bias will hold if the SMA points down and the RSI stays below 50.

On the daily chart, price action shows a solid and clear shift in sentiment to bearish. The price has broken below its bullish trendline and trades far below the 22-SMA, indicating a steep decline. Meanwhile, the RSI has dipped into the oversold region, showing solid bearish momentum.

Bears recently broke below the 1.0950 critical support level. Furthermore, the sharp decline is quickly approaching the 1.0780 support level. After such a rapid fall, bears might pause at 1.0780 to allow the SMA to catch up before the downtrend continues.

At the same time, it might pull back to retest the 1.0950 level as resistance. However, given the solid momentum, EUR/USD might not make significant pullbacks. Meanwhile, a break below the 1.0780 support will allow the price to reach the 1.0674 support level.

Key Support Levels

Support 1: 1.0825, the recent 4-hour chart swing low

Support 2: 1.0780, a daily chart swing low and trendline support

Support 3: 1.0674, a daily chart swing low and trendline support

Key Resistance Levels

Resistance 1: 1.1001, a 4-hour chart key support and resistance level

Resistance 2: 1.0950, a daily chart range resistance level

Resistance 3: 1.0900, a recent 4-hour support turned resistance level

EUR/USD Fundamental Analysis

All signs point South for the EUR/USD pair on the fundamental side. The European Central Bank meeting weighed on the pair since the central bank lowered borrowing costs by 25-bps. Economists initially expected the central bank to cut rates in September and October. However, the economic scene shifted, leading to an increase in rate-cut expectations.

The Eurozone economy has slowed down significantly, with data on business activity weighing on the euro. At the same time, inflation has dropped to 1.8%, below the central bank’s target. Most major central banks are more focused on preserving growth after a period of high interest rates. Furthermore, keeping inflation at healthy levels is essential.

Consequently, Lagarde started hinting at a possible cut in October. However, during the meeting on Thursday, she failed to give guidance on the future. Nevertheless, analysts believe the central bank will implement a third cut in December. Consequently, markets are pricing a total of 29-bps by the end of this year. Still, it will depend on incoming data.

Elsewhere, the EUR/USD has trended lower due to a stronger dollar. A combination of upbeat US data and increased bets for a Trump win have supported the greenback. Markets are now pricing a gradual pace for rate cuts in the US. Furthermore, a Trump win could bring back inflation, pausing rate cuts.

Final Thoughts

The EUR/USD pair is on a clear downtrend, with the European Central Bank cutting interest rates. The Eurozone economy has slowed significantly, and inflation is below the central bank’s targets. Furthermore, a strong dollar is putting downward pressure, creating a bleak outlook. The pair will likely continue declining if these factors remain in play.

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