EUR/USD Eyes Upside After Powell Sparks Dollar Weakness

• Powell flags rising downside risks to U.S. employment
• Short-dated Treasury yields hit multi-month lows
• EUR/USD breaks recent downtrend, tests resistance
• Momentum signals remain neutral, price action key

EUR/USD Outlook Summary

EUR/USD has bounced sharply following Jerome Powell’s remarks that reinforced expectations for another Fed rate cut later this month. While technicals show resistance being tested after a trend break, momentum remains neutral, leaving near-term setups dependent on price action. With light data ahead, Fed speakers could provide the next directional catalyst.

Dovish Powell Halts USD Rebound

EUR/USD has bounced strongly over the past two sessions, coinciding with remarks from Federal Reserve Chair Jerome Powell at a National Association for Business Economics event earlier in the week. Powell continued to flag downside risks to the U.S. labor market, doing little to dissuade market pricing that sees another rate cut later this month as essentially locked in.

Source: Bloomberg

“While the unemployment rate remained low through August, payroll gains have slowed sharply, likely in part due to a decline in labor force growth due to lower immigration and labor force participation,” Powell said. “In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen.”

Powell’s remarks did not meaningfully shift near-term expectations for the Fed funds rate, but they did push Treasury yields further out the curve lower, sending the policy-sensitive two-year tenor to levels not seen since May.

Despite EUR/USD showing no consistent relationship recently with outright U.S. yields or yield differentials with Europe over timeframes ranging from one week to one month, it’s hard to ignore that since Powell’s speech—which included comments that quantitative tightening may be paused soon—the dollar has been offered. That likely contributed to the bounce in EUR/USD, defying what has been an uninspiring run of euro area economic data relative to expectations.

EUR/USD Eyes Upside 

Source: TradingView

Looking at EUR/USD on the daily chart, you can see the price is currently testing minor resistance at 1.1650 having broken the downtrend that had been in place from the high set on September 17 on Wednesday. The bullish move was sparked after bears failed to take out the October 9 low of 1.1544. Given where EUR/USD now trades, it provides multiple setups to consider depending on how the near-term price action evolves.

Should we see the pair push above 1.1650, longs could be established with a tight stop below for protection. EUR/USD has seen a flakey relationship with the 50-day moving average recently, sometimes interacting with it and others not. Despite that, it cannot be ignored among those contemplating bullish setups, making it screen as an initial target to consider. Should it be cleared successfully, the pair ran into sellers late last month and in early October above 1.1750, putting it on the radar for consideration.

Alternatively, should the pair remain capped beneath 1.1650, the setup could be flipped with short positions established beneath with a tight stop above for protection. The obvious target would be the double-bottom set earlier this month at 1.1544.

When it comes to directional bias, both RSI (14) and MACD are providing neutral signals on momentum, placing more emphasis on price action in the near term. While RSI (14) has broken the downtrend it had been in over the past month, that only suggests bearish momentum is now diminishing, rather than delivering an outright bullish signal.

With several ECB speakers due, including President Christine Lagarde, the European calendar is otherwise light, including the final read of September inflation which rarely surprises. On the U.S. side, tradable economic signals are scarce amid the ongoing government shutdown, leaving Fed speakers as the most likely source of a fundamental catalyst.