Fed Poised to Cut – Powell’s Words Will Drive Markets

EUR/USD Clears Key Channel, but Thin Volume Limits Follow-Through

The US Dollar finished its second straight week in the red, mostly because a Fed rate cut is almost fully priced in. The US Dollar Index (DXY), which measures the greenback’s performance against a basket of 6 other currencies, opened last week at 99.480 and finished at 98.986, marking a 5-week low.

The Core PCE Price Index, which is the Fed’s preferred inflation gauge, was finally released last week, with a 35-day delay due to the U.S. government shutdown. The reading was in line with analysts’ expectations, showing that inflation increased by 0.2%.

Considering that inflation is not a major concern at the moment, the Fed will likely want to give a boost to the labor market, which has been struggling for a while. This means that a 25-bps rate cut is coming this week, and the CME FedWatch tool agrees, showing nearly 90% probability for this scenario.

Economic Calendar Highlights

The JOLTS Job Openings for September and October will be released on Tuesday at 3:00 pm GMT. These are two simultaneous releases because the September data was not released due to the government shutdown. The October data is delayed by 7 days. Usually, this is not a market mover, but it’s the only labor-market data the Fed has available before the FOMC rate meeting.

The Fed interest rate decision will be announced on Wednesday at 7:00 pm GMT and will be followed half an hour later by the usual press conference held by Fed Chair Jerome Powell. Considering that the rate outcome is almost certain, the press conference will be more important, especially if Powell gives hints about the pace of future cuts.

Technical Outlook – EUR/USD

The dollar’s weakness allowed the euro to pull the pair higher, breaking out of the descending channel that had confined the price since August. This recent breakout is important because the upper part of the channel and the resistance at 1.1600 formed a confluence zone. Usually, such zones are hard to break, but when it happens, it’s a sign of strength that points toward a stronger move in the direction of the break.

However, currently there’s a lack of volatility, volume is relatively low, and most candles are small. This means that the pair could change direction quickly if one side receives even a small incentive. The resistance at 1.1700 is the closest level of interest, but the level at 1.1900 is a stronger resistance and will be more important for medium-term price action. Jerome Powell’s comments at the press conference will probably be the deciding factor for the next move.