Fed Enters Wait-and-See Mode Ahead of NFP and CPI

EUR/USD Confirms Breakout but RSI Warns of Pullback

The Fed decided to cut the interest rate last week, as it was largely anticipated; however, the narrative has now transitioned to a ‘wait and see’ approach. For the first time since 2019, three FOMC members disagreed with the majority: two members voted to hold the rate steady, while another member voted for a 50 bps cut, according to the FOMC statement.

As expected, the dollar had a tough week, with most of the losses coming on Wednesday, the day of the rate cut. The US Dollar Index (DXY), which measures the dollar’s performance against 6 of its peers, ended last week at 98.39, dropping from a weekly high of 99.31. The euro gained ground on the dollar, ending the week at 1.1737 and confirming a breakout from the descending channel.

The Fed mentioned that future rate cuts will depend on the data that’s coming out and at the moment the consensus points toward a pause. The CME FedWatch only shows a 24% probability of another cut in January but we have a week filled with major data ahead, so probabilities can change.

Economic Calendar Highlights

The main event of the week will be the release of the Non-Farm Payrolls (NFP), scheduled for Tuesday at 1:30 pm GMT. The report comes out 8 days after the scheduled date, due to the U.S. government shutdown and will likely create huge volatility, especially because the Fed’s next rate move depends on this data.

The Average Hourly Earnings, Unemployment Rate, and Core Retail Sales will come out at the same time as the NFP. The Manufacturing and Services PMIs will come out a bit later on the same day, at 2:45 pm GMT, so there will be a lot to digest on Tuesday.

Thursday will be an important day for the pound and the euro, as both central banks will announce their respective interest rates. At 12:00 pm GMT, the Bank of England (BoE) is expected to announce a cut the rate form the current 4.00% to 3.75%. The European Central Bank (ECB) will announce the rate decision at 1:15 pm GMT, with no cut expected.

The last major release of the week will be the U.S. Consumer Price Index (CPI), which is the main gauge of inflation, and is of course, closely watched by the Fed as part of their dual mandate to keep inflation low and job creation high. The release is scheduled for Thursday at 1:30 pm GMT.

Technical Outlook – EUR/USD

The pair broke out of a descending parallel channel and even moved above the horizontal resistance at 1.1700. This opens the door for the euro bulls to challenge the top at 1.1900 but that may be a tall order, at least at this time.

The RSI is very close to overbought territory, which is not a sell signal by itself but it is indicating that a pullback will happen sooner rather than later. The key levels at the moment are the BRNs (big round numbers): 1.1700, 1.1800 and 1.1900. A pullback may find support at 1.1600. Keep in mind that we have a week full of major releases, which will most likely dictate the price direction.