Dollar Strengthens Despite Rate Cut. PCE Takes Center Stage

RSI Flashes Bearish Divergence: EUR/USD Going Downhill?

In a move that was largely anticipated by market participants, the Fed decided to cut the interest rate by 25 bps last week. The US Dollar Index (DXY), which tracks the dollar’s performance against a basket of 6 major currencies, dropped initially from 97 to 96.22. Soon after the announcement, the DXY recovered and ended the week at 97.64.

Although the cut was delivered, the market considered that the Fed was not dovish enough, as Powell did not signal an extended wave of rate cuts. According to the CME FedWatch tool, there is a 92% chance the Fed will lower the interest rate by 25 bps again in October and an 80% chance they will do the same at their December 10 meeting.

Economic Calendar Highlights

The first part of the week will be dominated by Purchasing Managers’ Index (PMI) releases, starting on Tuesday at 7:30 am GMT with the German Manufacturing and Services PMIs, and followed at 8:00 am GMT by the same indicators for the British economy. The U.S. PMIs will be released later in the day, at 1:45 pm GMT.

On Tuesday at 4:35 pm GMT, Fed Chair Powell will speak about the economic outlook at a luncheon organized by the Rhode Island Chamber of Commerce. Audience questions are expected, so the event may trigger increased volatility.

The main event of the week will be the release of the Core PCE Price Index, which is the Fed’s preferred inflation gauge and has a strong impact on rate decisions. The expected change is 0.2%, lower than the previous 0.3%; the time of the release is 12:30 pm GMT, on Friday.

Technical Outlook – EUR/USD

The pair printed a higher high on Wednesday, but the gains were quickly nullified, and the dollar bulls took the pair closer to 1.1700 support. The bounce at 1.1900 resistance is a clear sign that the uptrend is wavering despite the recent Fed rate cut.

Comparing the high made on July 1st and the high made last week, we can see that the RSI made a lower high the second time, although the price made a higher high. This is known as bearish divergence, which more often than not results in a move lower.

The first bearish target is the support at 1.1700, followed by the lower Bollinger Band. The bearish trend line drawn from the July 1st high may offer support, but it is not a major hurdle. If the bulls fail to break 1.1700, we will most likely see another attempt to break through the resistance at 1.1900.