FX.co ★ EUR/USD

EURUSD. Hello everyone. I want to share with you the fresh data as of October 18 and my thoughts on the current situation, because the setup is becoming interesting and it directly concerns the levels we have been discussing recently. The fresh data confirm that the levels for the pair look very precise, and the market is indeed balancing between them right now, which indicates our previous calculations were correct. Pressure on the dollar has eased, and that gave the euro a chance to bounce, which we are now observing. But let's go through everything in order so the logic of what is happening is clear. Let's start with the Fed rate, because the October pause looks almost decided, and that is the main driver for the pair at the moment. The sharp drop in the probability of a rate hike in October became the key factor that changed the market dynamics. After Fed chair Kevin Warsh said the economy was broadly in line with expectations, the market repriced the odds, and the probability of a pause at the October 28 meeting rose to 85 percent. A month ago the market assessed the chances of a hike and a pause as roughly 50/50; now the probability of a hike has fallen to 15 percent, and that is a significant shift in market expectations. This is important because Warsh made it clear that the hot September CPI at 3.7 percent year-on-year did not change his overall view. The market took this as a signal that the October meeting will most likely be unchanged and that the rate question has shifted to December, which gives the euro room to recover. Now on to ten-year bonds and spreads, because here the situation looks like a breather, not a reversal. US ten-year yields retreated from peaks above 5.3 percent to 5.07–5.09 percent, and that gave the dollar a respite, allowing the euro to bounce off the lows. However, ING analysts warn this is a short-term phenomenon, and they expect yields to return to the 5.25–5.5 percent range because high inflation and the budget deficit haven't gone away. That means the fundamental pressure on the euro from yields remains, and the current decline in yields may be temporary, so the euro bounce may be short-lived. Spreads have improved slightly: French OATs pulled back to 4.78 percent, and the spread with German Bunds narrowed to 136–137 basis points. This is still very wide, at the level of the 2011 debt crisis, but the movement is in the right direction and offers some hope. The problem is that France's budget package was rejected by the finance committee, and the vote on Monday promises to be difficult, which creates uncertainty and could put pressure on the euro. Separately, it's worth mentioning Trump, because his recent posts on Truth Social this week concern the domestic agenda and his campaign, not rates. He shared a long post by a Black commentator criticizing the Democrats to court African American votes ahead of the midterms. He also posted a video and an AI clip of a tiger attack at a British zoo, which drew criticism but is unrelated to markets. The only thing remotely related to markets is that Trump again criticized Ukraine's strikes on Russian oil refineries, saying they push up diesel and oil prices. This is more of an energy factor than a monetary one, but it's worth keeping in mind because energy affects inflation and, consequently, rate expectations. Now let's move on to the levels, because this is where the picture becomes most interesting. The logic by levels fully matches the current picture, and the pair closed the week around 1.1238, which is indeed a balance zone. If the price breaks 1.12524, that will mean the bounce from 1.1112, which was the October 14 low, has continued. The nearest resistance in that case is at 1.1286, the October 2 high, then 1.1337, the October 1 high. Standard Chartered has already said it is opening a long position in the euro, expecting the bounce to continue amid dollar weakness, and that confirms the bullish scenario. If bears push the pair below 1.12263, that will be a signal that the bounce has run out of steam, and then targets of 1.11613–1.11125 look logical. The October 14 low was 1.1113, and a retest of that level is quite possible if US yields rise again. ING explicitly says it sees 1.11 as the key support and recommends selling rallies while French fiscal uncertainty persists. To sum up, the pair's bounce is a story about dollar weakness, not euro strength. Warsh gave the market a pause, yields pulled back, and that was enough to move toward 1.1240. But the structural problems for the euro, such as France and energy, haven't gone away, and US yields will most likely return to 5.25 percent and above. The levels are the perfect filter for decision-making: a break of 1.12524 will confirm the correction is continuing, while a move below 1.12263 will return the focus to the lows. The near-term triggers are the French budget vote on Monday and the dynamics of US yields early in the week. Good luck to everyone and profitable trades.