FX.co ★ EUR/USD

EURUSD. Hello everyone. I want to share with you fresh data as of October 18 and my thoughts on the current situation, because the setup is getting interesting and it directly concerns the levels we’ve been discussing recently. The fresh data confirm that the levels for the pair look very accurate, and the market is indeed balancing between them now, which indicates that our previous calculations were correct. Dollar pressure has eased, and that gave the euro a chance to bounce, which we are seeing now. But let’s go through everything in order so the logic of what’s happening is clear. Let’s start with the Fed, because the October pause looks almost decided, and this is the main driver for the pair at the moment. The sharp fall in the probability of a rate hike in October became the key factor that changed the market dynamics. After Fed official Kevin Warsh said that the economy broadly matched expectations, the market reassessed the odds, and the probability of a pause at the October 28 meeting rose to 85 percent. A month ago the market priced hikes and a pause at about 50/50, but now the chance 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 a hot September CPI at 3.7 percent year-on-year didn’t change his overall view. The market took this as a signal that the October meeting will most likely be unchanged and that the rate decision is shifting to December, which gives the euro room to recover. Now about 10-year bonds and spreads, because here the picture looks like a breather rather than a reversal. US 10-year yields pulled back from peaks above 5.3 percent to 5.07–5.09 percent, and that gave the dollar a breather, allowing the euro to bounce off the lows. However, ING analysts warn this is a short-term phenomenon and expect yields to return to the 5.25–5.5 percent range, since high inflation and the budget deficit haven’t gone away. That means the fundamental pressure on the euro from yields remains, and the current yield decline may be temporary — so the euro’s bounce could be short-lived. Spreads have improved a bit: French OATs pulled back to 4.78 percent, and the spread versus German Bunds narrowed to 136–137 basis points. That’s still very wide, at levels reminiscent of the 2011 sovereign debt crisis, but 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, creating uncertainty that could weigh on the euro. It’s worth mentioning Trump separately, because his recent posts on Truth Social this week concern domestic issues and the campaign rather than 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 that’s indirectly market-related is that Trump again criticized Ukraine’s strikes on Russian oil refineries, saying it pushes up diesel and oil prices. That’s more of an energy factor than a monetary one, but it’s worth keeping in mind since energy affects inflation and, therefore, rate expectations. Now to the levels, because this is where the picture is most interesting. The logic by levels fully matches the current picture, and the pair closed the week around 1.1238, which is indeed a zone of balance. If 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 supports the bullish scenario. If bears push the pair below 1.12263, that will signal 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 move higher again. ING explicitly says it sees 1.11 as key support and recommends selling rallies while French fiscal uncertainty persists. In summary, 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 for a move to 1.1240. But the euro’s structural problems, 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 an ideal filter for decision-making: a break of 1.12524 will confirm the correction is continuing, while a drop below 1.12263 will refocus attention on the lows. The nearest triggers are the vote on France’s budget on Monday and US yield dynamics early in the week. Good luck and profitable trades.