21.11.202315:25 Forex Analysis & Reviews: EUR/USD: Rally towards 1.10 in question

The euro-dollar pair continues to climb, concurrently updating local price highs. Today, buyers marked the level of 1.0966—the highest price since August 11. On the horizon looms the main price barrier—the target of 1.1000—but the path to it, as they say, is "thorny, bumpy, and not easy." However, if we abstract from intraday price fluctuations, one can be impressed by the success of EUR/USD buyers, as in just over a week, the pair has jumped almost 300 points. And most importantly, traders are holding their positions, trying to build on this success.

This year, buyers of the pair have repeatedly tried to conquer the 1.10 level. The most successful attempt was in July when the price jumped to 1.1276 (2023 high). But then the pair made a 180-degree turn and, for several weeks, demonstrated a downward movement.

To date, such a scenario is only possible if the Federal Reserve raises the interest rate in December, contrary to the market's general expectations of maintaining the status quo. CME FedWatch Tool data indicate that traders are 100% confident that the Fed will keep the rate unchanged, both at the December meeting and in January. Therefore, an unexpected hawkish decision will return the dollar bulls to their former glory, allowing EUR/USD bears to recover lost points with interest.

This development cannot be ruled out (considering that the majority of Fed members still maintain a "moderately hawkish" position), but it is unlikely. According to the baseline scenario, the U.S. regulator will keep the rate at the current level in the foreseeable future, monitoring inflation dynamics.

However, here arises another problem for EUR/USD buyers. The fate of the upward trend is, essentially, also in the hands of the Federal Reserve. At the moment, the market is playing out the end of the current tightening cycle of the monetary policy, but for the sustainable development of the upward movement (above the 1.1000 target), a more significant information trigger is needed—namely, the Fed's readiness to ease monetary policy.

Currently, there are no such signals from the Federal Reserve. Most Fed representatives acknowledge progress in combating inflation but suggest that they are ready to keep the rate at the current level for a sufficiently long time (often using the formulation "as long as necessary"). Moreover, when the discussion turns to the prospects of easing monetary policy, central bank officials deny such intentions, stating that this issue is not even being discussed at this time.

In my opinion, until Federal Reserve representatives soften their position (i.e., start discussing the conditions for a rate cut, even hypothetically), it will be difficult for EUR/USD buyers to stay above the 1.1000 target.

The current price increase is driven by several fundamental factors. Firstly, there is a sharp decline in hawkish expectations regarding the further actions of the Federal Reserve (as mentioned earlier). The trigger here was the inflation reports, which reflected a slowdown in inflation in the United States in October. Secondly, the EUR/USD pair is rising due to increased interest in risk assets. Key Wall Street indices confidently rose after yesterday's trading. In particular, the Nasdaq Composite index increased by 1.13% (to 14284.53 points), reaching the highest closing level since July 31. The Dow Jones Industrial Average added 0.58%, reaching the highest level since August 14 (35151.04 points), and the S&P 500 rose by 0.74%, updating the highest value since August 1.

Commenting on the results of yesterday's trading, representatives of the credit rating agency Moody's noted that the derivatives market reflects growing confidence that the Fed's interest rate will be lowered by one percentage point by the end of 2024, with the first cut occurring at the May meeting. According to the CME FedWatch Tool, the probability of a 25-point rate cut in May next year is 47%.

Another driver of the EUR/USD growth is the ECB, whose representatives have recently noticeably tightened their rhetoric. Among them are Pierre Wunsch, Robert Holzmann, and Martins Kazaks. According to them, market participants are overly confident that the current cycle of ECB monetary policy tightening is complete.

Thus, the established fundamental background contributes to further price growth. The target of the upward movement is the key resistance level of 1.1000, but in this price range, it is advisable to take profits, as further (sustainable) growth of the EUR/USD will be in question. Additional impetus to the pair may be provided by the core PCE index (October value will be known on November 30), if it turns out to be in the "red zone," but there is still more than a week until its release. Therefore, when reaching the 1.10 figure, buyers should exercise caution, as the upward momentum may finally fade in this price range.