13.09.202417:38 Forex Analysis & Reviews: The Euro Takes Its Words Back

The European Central Bank is reassessing its recent decisions, while the Federal Reserve is keeping investors guessing about how it will begin easing monetary policy. In this context, EUR/USD bulls are attempting to build on their success. However, breaking above the 1.11 level on the first attempt has proven difficult. The euro needs support from U.S. stock indices. Will the euro receive it?

Bloomberg's consensus estimate suggests that the Federal Reserve will cut rates by 75 basis points in 2024. The futures market anticipates a 100 basis point cut from the central bank. Who is right? The answer to this question will come with the FOMC's September forecasts. Meanwhile, it's time to look back at history.

In four of the last nine monetary expansion cycles, the Federal Reserve began with a 25 basis point cut. A larger step was usually required due to a sharp deterioration in the U.S. economy, as seen during the 2008 global financial crisis. However, a quarter-point cut is not uncommon.

Fed Rate Dynamics and Monetary Expansion Cycles

A significant pattern can be observed in the sequence of rate cuts. Usually, the first cut was followed by several more monetary easing moves. The exception was the 1995 cycle, where more than two months passed between the first and second cuts, marking a rare occurrence of a more gradual approach. Interestingly, this period saw the soft landing that the Fed now strives for. It appears that greater caution is needed to achieve such a result. However, the markets are calling for aggression, which could lead to disappointment.

While the Federal Reserve contemplates, the ECB is already acting. Two 25 basis point cuts in the deposit rate haven't particularly frightened EUR/USD bulls. On the contrary, following the latest move, the pair rose toward 1.11, aided by comments from Christine Lagarde. The French central banker stated that inflation is expected to slow further in September but emphasized that the ECB's data dependency does not mean it will react to just one data point. Investors interpreted this as a rejection of further easing in October, leading to euro purchases.

Dynamics of European GDP and Inflation

In reality, several members of the Governing Council have opposed such an approach. They prefer to keep the door open for continuing the monetary expansion cycle next month. This is evidenced not only by a Bloomberg insider report but also by Christine Lagarde's clarification. The ECB president noted that another deposit rate cut in October is possible if the economy suffers a significant setback.

Thus, the Federal Reserve is preparing to lower the federal funds rate for the first time since 2020, while the ECB is not ruling out the continuation of its rate-cutting cycle at the next meeting, leaving euro bulls on edge.

Technically, the daily EUR/USD chart shows a test of fair value at 1.108. If buyers fail to hold prices above this level, the risk of a decline in EUR/USD toward 1.100 will increase. Weakness among the bulls will provide an opportunity for selling.