Expectations of interest rate cuts are rising, and the USD/EUR exchange rate is hovering at a critical level

The US Dollar Index is fluctuating around 100.16, while the EUR/USD currency pair showed a complex battle between bulls and bears on Monday. Against the backdrop of dovish signals from Federal Reserve officials, traders’ expectations for a rate cut in December have surged sharply, reshaping the market’s pricing logic.

Fed Officials Pave the Way for Rate Cuts, Market Expectations Shift Dramatically

The recent policy statements from the Federal Open Market Committee (FOMC) have become the focus. Fed Governor Christopher Waller explicitly stated that the labor market remains weakening and that further easing measures are needed in December. New York Fed President John Williams also opened the door for a rate cut, and the dovish stance of these two policymakers has significantly altered market expectations.

According to CME FedWatch data, traders’ probability of a rate cut in December has skyrocketed from 31% last week to 80%. This increase reflects a high degree of certainty in the market regarding the Fed’s policy shift and also explains the recent volatility in the USD/EUR exchange rate.

Non-Farm Payrolls Surpass Expectations, but Economic Outlook Remains Divided

Last week’s US labor market performance defied pessimistic forecasts. Non-farm payrolls increased by 119,000 in September, far exceeding the expected 50,000, providing some support for the dollar. However, the release of the University of Michigan Consumer Sentiment Index and S&P Global PMI reports showed mixed signals, weakening optimism about the economic fundamentals.

This week’s economic calendar is particularly busy. Producer Price Index (PPI) and retail sales data will be released sequentially, and initial jobless claims (adjusted for the Thanksgiving holiday) are also on traders’ radar. These data points will directly influence the Fed’s judgment on the necessity of further easing.

Weak European Data, ECB Maintains Cautious Stance

European Central Bank (ECB) policy stance has added pressure on the euro. Germany’s IFO Business Climate Index fell from 88.4 in November to 88.1, failing to meet expectations. ECB members, including Bundesbank President Joachim Nagel, emphasized concerns over persistent food inflation and rising service prices. While Nagel believes the current policy stance is appropriate, this cautious attitude contrasts sharply with the Fed’s dovish turn.

Technical Analysis: EUR/USD Holds Above Key Support

EUR/USD remained around 1.1525 on Monday, recording a modest 0.10% gain, with the daily high reaching 1.1550 and the low near 1.1500. Although technical indicators still suggest a downtrend (RSI remains below the neutral level of 50), the currency pair has found some support at key levels.

If the USD/EUR breaks above 1.1550, the next resistance will be at the 20-day simple moving average (SMA) at 1.1560. A successful breach of this level could target 1.1600, followed by the convergence zone of the 50-day and 100-day SMAs at 1.1637/1.1648, ultimately possibly reaching the psychological level of 1.1700.

Conversely, if it falls below the key support at 1.1500, EUR/USD will face the November 5 low of 1.1468, with a deeper threat near the 200-day simple moving average at 1.1409. The ability to hold or break these levels will determine the true direction of the short-term trend.

Upcoming US economic data and European developments this week will further influence the future trajectory of USD/EUR. Traders should closely monitor the interaction between policy expectations and economic realities.