FX.co ★ berta.hill | EUR/USD

EURUSD. Hello everyone. I want to share with you the latest data as of October 18 and my thoughts on the current situation, because the picture 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 now, which suggests our previous calculations were correct. Pressure on the dollar has eased, giving the euro a chance to bounce, which we are now observing. But let’s go through everything step by step so the logic of what’s 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 balance. After Fed head Kevin Warsh said the economy broadly matches 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 saw 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 serious 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 picture. The market took this as a signal that the October meeting will most likely be unchanged and that the rate question shifts 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 rather than a reversal. US ten-year yields pulled back from highs above 5.3 percent to 5.07–5.09 percent, and this gave the dollar a respite, allowing the euro to bounce off its 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, since high inflation and the budget deficit have not 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 could be short-lived. Spreads have improved slightly: French OATs have pulled back to 4.78 percent and the spread with German Bunds has narrowed to 136–137 basis points. That is still very wide, at levels seen during the 2011 debt crisis, but the move is in the right direction and gives 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 pressure the euro. It’s worth mentioning Trump separately, because his recent posts on Truth Social this week concern domestic politics and the campaign rather than rates. He shared a long post from a Black commentator criticizing the Democrats in order to court Black voters 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 indirectly related to markets is that Trump again criticized Ukraine’s strikes on Russian oil refineries, saying they push up diesel and oil prices. That is more of an energy factor than a monetary one, but it’s worth keeping in mind because energy affects inflation and therefore rate expectations. Now 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 zone of balance. If the price breaks 1.12524, it will mean that 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 on the euro, expecting the bounce to continue amid dollar weakness, and that supports the bullish scenario. If bears push the pair below 1.12263, it will 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 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 retraced, and that was enough to move to 1.1240. But 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. Levels are the perfect filter for decision-making: a break of 1.12524 will confirm the correction continues, while a move below 1.12263 will refocus attention on the lows. The nearest triggers are the vote on France’s budget on Monday and the dynamics of US yields early in the week. Good luck and profitable trades to all.