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EUR/USD analysis: Stability, speculations, and central bank strategies

eurusd analysis, forex trading

The Euro to Dollar (EUR/USD) exchange rate has shown a relatively stable trend this year, with a notable exception when it briefly exceeded the 1.10 mark. Currently, it is positioned slightly above 1.08. Economists, analyzing market trends and economic indicators, predict that the Euro might experience a decline, potentially testing the 1.05 level, which was last observed in October. This forecast is based on various economic factors, including market volatility and geopolitical situations affecting both the Eurozone and the US. The belief that the Eurodollar could break through this level and decline further is rooted in the ongoing economic and political developments in Europe and their impact on the currency market.

Reflecting on the performance of the EUR/USD exchange rate at the start of 2024, it experienced a significant rise, reaching local highs during the Christmas period with values surpassing 1.11 dollars. This bullish trend, however, was short-lived as the pair soon entered a corrective phase. The rate declined towards the lows of February, marked at 1.0750 dollars, which represented a loss of approximately 4 cents. This correction in the exchange rate can be attributed to various factors including changes in investor sentiment, economic data releases from both the Eurozone and the United States, and adjustments in monetary policies by central banks. The swift shift from a bullish to a bearish trend indicates the high volatility and uncertainty prevalent in the currency markets.

After this initial decline, the EUR/USD made a move back towards the previously mentioned level of 1.10 dollars, only to undergo another corrective phase, bringing it back around the 1.0750 dollar mark. Currently, the exchange rate finds itself midway within this range, fluctuating between two significant technical indicators - the 50 and 200-day Exponential Moving Averages (EMA). These EMAs are important tools used by traders and analysts to gauge market sentiment and predict potential future movements. The fact that the EUR/USD is trading between these averages suggests a state of uncertainty and indecision among investors, with the currency pair lacking a clear directional trend.

Central banks' policies, particularly those of the European Central Bank (ECB) and the Federal Reserve (Fed) in the United States, are expected to play a pivotal role in shaping the future trajectory of currencies. Recent economic data from the US has been somewhat disappointing, leading to a belief that it may take several months before the Fed is in a position to consider lowering interest rates. This stance contrasts with the view from Goldman Sachs, which anticipates several rate cuts in the USA within the year. The implication here is that divergent monetary policies and economic outlooks between the Eurozone and the US could lead to significant movements in the EUR/USD exchange rate. The prediction of a delayed rate cut by the Fed aligns with a cautious approach in response to mixed economic signals from the US economy.

The expectation for the first interest rate cut from the Fed is set for September. Concurrently, market analysts and economists are convinced that the ECB will proceed with an interest rate cut in June, aligning with their efforts to stimulate the European economy. The anticipation of these actions indicates a divergence in monetary policy approaches between the two central banks. Such divergence is likely to have a significant impact on the EUR/USD exchange rate. The potential interest rate cuts are reflective of broader economic trends and policy responses to current global economic challenges, including inflation and economic growth concerns.

Market analysts express the belief that the EUR/USD exchange rate will largely move sideways in the foreseeable future. This sideways movement, characterized by minimal upward or downward trends, suggests a period of relative stability or indecision in the market. Analysts are considering various factors, including economic indicators, geopolitical developments, and central bank policies, that could influence the currency pair. However, the overall expectation is that these factors will balance each other out, resulting in limited significant directional movement in the EUR/USD exchange rate.

While there is an element of uncertainty looking beyond the immediate future, analysts expect a pattern of one interest rate cut per quarter. They also anticipate that the overall economic performance of the United States will provide support for the dollar. This is based on the assumption that the Fed will maintain a cautious policy stance, potentially leading to a stronger dollar if the US economy performs well. The Fed's cautious approach, amid uncertain economic conditions, reflects a strategy of balancing growth with financial stability.

Analysts also speculate that a potential victory for Trump in the elections could initially boost the American currency, leading to a decrease in the EUR/USD exchange rate. This prediction is based on the expectation that a political change of this magnitude could affect investor confidence and market perceptions, particularly regarding fiscal and economic policies. However, they also foresee this effect being counterbalanced by improvements in the global economy, which would limit the need for defensive investments in the US dollar. The global economic improvement could shift investor preferences towards riskier assets, thus reducing the demand for the dollar as a safe haven.

In evaluating the balance of forces influencing the EUR/USD exchange rate, it is anticipated that the currency pair will remain confined within relatively narrow ranges during the forecast period. This expectation stems from the various counteracting factors, including economic data, central bank policies, and geopolitical events, which are likely to maintain a state of equilibrium in the market. The lack of a clear directional trend in the short to medium term points to a cautious approach by investors, who may be awaiting clearer signals before committing to more pronounced positions.

Over the long term, the prevailing lower global interest rates are expected to continue supporting economic activity and risk sentiment, which could diminish the appeal of the US dollar as a safe haven. This trend suggests that investors might turn to riskier assets in search of higher returns, as the lower interest rates reduce the attractiveness of holding safer, lower-yielding assets like the US dollar. The shift away from the dollar in this scenario would be a reflection of broader confidence in global economic stability and growth, encouraging investment in riskier assets and markets.

eurusd analysis, forex trading
EUR/USD daily chart, MetaTrader, 08.04.2024



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