EUR/USD weekly outlook: FOMC and ECB to set the tone

The near term EU/USD outlook could be shaped by this week’s central bank meetings as both the Fed and ECB decided whether to hold fire or hike again. The current backdrop is modestly bearish. On Friday, the EUR/USD closed modestly lower, down for the third consecutive day. The pair also posted a weekly decline after staging a modest recovery attempt in the previous week. Out of the past 8 weeks, the EUR/USD has fallen on 6 occasions. There is not much supporting factors for the single currency right now. So, the upside remains capped.

The French-German yield spread widened further last week, crude oil prices continued to rise and the tech sector came under renewed pressure again. Unless something changes fundamentally, the EUR/USD outlook remains tilted to the downside, and a visit of 1.1000 is still not out of question.

Risk appetite was hit last week

Global equity markets weakened on Friday. Energy prices remained on the front foot on concerns over a renewed escalation in the Middle East, while lingering doubts over the economics and financing of the AI data-centre boom also remain in focus. French-German bond yield spreads also widened as investors become increasingly sceptical about the country’s ability to deliver meaningful fiscal consolidation.

Against that backdrop, it is difficult to make a convincing bullish case for the EUR/USD outlook. At the same time, the unresolved risks mean there is still a decent argument for keeping some exposure to the dollar. The next few days of earnings and geopolitical headlines could therefore prove important for determining whether the recent equity weakness develops into something more significant, and whether that could give rise to fresh dollar demand amid increased haven flows.

Dollar’s downside could be limited amid energy spike

Energy remains the bigger issue for the EUR/USD outlook. Oil prices climbed further higher last week as traders continued to price the risk of renewed US or Israeli action against Iran ahead of the US midterm elections.

As long as energy prices remain high, there is less scope for Treasury yields to fall significantly, which in turn limits the downside for the dollar.

At the same time, higher energy prices are weighing on the appeal of the euro and other currencies where the economy relies on energy imports.

France-Germany yield spread widens

French fiscal concerns provide another source of support for the dollar last week. With French spreads continuing to widen, investors are becoming less convinced that Paris can deliver a credible path towards fiscal consolidation.

For now, the balance of risks therefore still favours buying the dollar on dips, keeping the EUR/USD outlook bearish particularly as energy prices remain elevated and French political and fiscal tensions intensify.

Week ahead: ECB and FOMC rate decisions

The FOMC rate decision is on Wednesday October 28. The recent risk off environment in stock markets and the drop in yields suggest markets have priced out a rate hike at this meeting. But the bar for markets to price out the prospect of a December Fed hike remains relatively high, which should limit the scope for a deeper USD correction. Comments from Warsh will be particularly important at this meeting.

The focus will then turn to the ECB rate decision a day later on Thursday, October 29. Despite growth indicators remaining relatively strong, some hawkish pressure on the European Central Bank is likely to persist especially with oil prices continuing to surge. However the situation in France and weakness for both the euro and equity markets highlights the central bank’s dilemma. A hawkish hold might be the outcome at this meeting.

EUR/USD outlook: Technical analysis and key levels to watch

From a technical analysis point of view, the EUR/USD remains biased to the downside. This is because the currency pair has recently been under intense pressure.

Although over the last couple of weeks consolidation has been the name of the game, the fact that EUR/USD hasn’t been able to lift off suggests that the underlying selling pressure remains. As such, I wouldn’t be entirely surprised if we see a breakdown towards the 1.1000 handle in the next couple of weeks, particularly if the Fed turns out to be more hawkish than expected on Wednesday.

From a technical point of view, a break below the 1.1180 area could trigger a slide towards the low from the previous week, which came in around 1.1113.

On the upside, key resistance has held around the 1.1250 area. A break above this level could pave the way for a move towards the larger resistance band between 1.1300 and 1.1350.

That’s where EUR/USD had previously found support in June before breaking lower in late September.

Should the pair break above the 1.1350 area, that would be a bullish development in the short term. It could then pave the way for a follow-up move towards the 1.1500 handle, and potentially higher as well.