EUR/USD extended its sharp multi-week decline on Wednesday, reaching new lows around 1.0760, extending further its recent breakdown of the critical 200-day Simple Moving Average (SMA) at 1.0870.
At the same time, the US dollar remained robust, pushing the US Dollar Index (DXY) well above the 104.00 mark for the first time since late July. The Greenback’s strength has been driven by fresh highs in US yields, supported by solid US fundamentals and a cautious tone from Federal Reserve (Fed) officials. Additionally, steady uncertainty ahead of the November 5 US election also added to the bid bias around the US Dollar.
In the meantime, many Fed policymakers are leaning toward a 25-basis-point rate cut next month, officials such as FOMC Governor Michelle Bowman and Atlanta Fed President Raphael Bostic have expressed some reservations. Bostic even suggested that the Fed might skip a cut in November. The CME Group’s FedWatch Tool currently shows a 90% probability of a quarter-point cut next month.
Across the Atlantic, the European Central Bank (ECB) met expectations by cutting policy rates by 25 basis points at its October 17 meeting, lowering the Deposit Facility Rate to 3.25%. However, ECB officials provided no clear direction on future moves, maintaining a data-driven approach.
Around the ECB, President Christine Lagarde stated on Wednesday that the ECB will need to exercise caution when deciding on further interest rate reductions, emphasizing that future decisions will be guided by incoming data. This was in response to a question regarding market expectations for additional and potentially larger rate cuts. Meanwhile, ECB Chief Economist Philip Lane noted that although recent weak data from the eurozone has raised concerns about the region’s economic outlook, the ECB still anticipates a recovery will take hold.
Eurozone inflation, measured by the Harmonised Index of Consumer Prices (HICP), dipped below the ECB's target to 1.7% in the year to September. Coupled with stagnant GDP growth, this could strengthen the case for further ECB rate cuts in the coming months.
As both the Fed and ECB consider their next policy steps, EUR/USD’s direction will be influenced by broader macroeconomic factors. With the US economy currently outperforming the Eurozone, the Greenback may continue to find support in the short to medium term.
CFTC data shows that speculative net long positions in the Euro have declined for three consecutive weeks amid a pullback in the long/short ratio. Meanwhile, hedge funds have been trimming their net short positions for six straight weeks, despite a slight decrease in open interest.
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