Euro to Dollar Week Ahead Forecast: 2024 High Back in Contention

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The setup behind the Euro to Dollar exchange rate (EUR/USD) is undeniably constructive, and there are good odds that the 2024 high will be tested either this week or next week.

The European Central Bank (ECB) cut interest rates last week, but the move hardly registered on the Euro. Now, it is the Federal Reserve's turn to cut interest rates, and the impact on financial markets will be more noticeable.

EUR/USD saw strong buying interest last Thursday on apparent leaks from the Federal Reserve that gave a strong hint that it would commence with a decisive 50 basis point interest rate cut instead of a vanilla 25bp move.

The leaks came via a number of financial news outlets, the most prominent coming from a journalist at the Wall Street Journal who is known to have close links with policymakers. Journalist Nick Timiraos said the Fed still faces a dilemma to "start big or small".

"EUR/USD has been given a further lift by the increased speculation that the FOMC may indeed cut by 50bps," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank Ltd.

He explains that the Timiraos article is "being interpreted by the markets as being an orchestrated move by the Fed given this journalist is known to have Fed links... we don’t know if this WSJ article has been orchestrated or not, but this leaves the decision next week finely balanced."

"One might think Fed officials wouldn’t push leaks suggesting 50bps if they felt market pricing of 25bps (which the market had converged with post CPI), matched the FOMC’s assumptions," says Sam Hill, Head of Market Insights at Lloyds Bank.

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He explains that the Fed might have preferred a modicum of space in pricing to reflect variances in the debate. "But to actively encourage the market to add back bets for more (via comments from ex-staffers and the WSJ’s Nick Timiraos), only to then deliver less, could call into question the credibility of the quiet period communications process."

The improved odds for a 50bp cut triggered a weaker U.S. Dollar and this snapped the Euro-Dollar exchange rate's September decline.

The Euro will likely extend its rally against the Dollar if the Fed does indeed cut by 50bp points on Wednesday. The obvious risk to the bullish setup is if the rumours prove to be unfounded and officials cut by just 25bp.

The disappointment would likely trigger a sharp retracement in Euro-Dollar, but we think weakness would be limited as a smaller cut would likely be accompanied by guidance alluding to the potential for at least one 50bp move before year-end.