EUR/USD Price Forecast: Outlook shifts to bullish above 1.0870

• EUR/USD added to the weekly recovery and flirted with 1.0870.
• The US Dollar weakened despite firm ADP and resilient GDP data.
• Germany’s flash Inflation Rate is seen ticking higher in October.

EUR/USD extended its weekly rebound on Wednesday, clinching its third consecutive daily advance and consolidating the breakout of the key 1.0800 barrier. In addition, the pair’s uptick flirted with the critical 200-day SMA near 1.0870.

On the flip side, the US Dollar’s (USD) rally showed signs of slowing, with the US Dollar Index (DXY) retreating for the third day in a row and retesting multi-day lows in the sub-104.00 region.

The move higher in spot came in tandem with some indecision in US yields across the curve vs. a sharp rebound in 10-year bund yields to multi-week tops around 2.40%.

Looking ahead, expectations for a 25 basis point rate cut by the Fed next month are building. However, some officials have voiced scepticism. Atlanta Fed President Raphael Bostic even hinted that the Fed might skip a rate cut in November.

Currently, the CME Group’s FedWatch Tool shows nearly full pricing for a quarter-point cut at the November 7 meeting.

In Europe, the European Central Bank (ECB) delivered a 25-basis-point rate cut on October 17, bringing the Deposit Facility Rate down to 3.25%, aligning with expectations. ECB officials have taken a cautious approach to further rate decisions, emphasising the importance of upcoming economic data. ECB President Christine Lagarde stressed the need for careful consideration in future policy amid the evolving economic landscape.

Within the ECB, views on additional rate cuts vary. ECB board member Isabel Schnabel remarked on Wednesday that, although the US presidential election represents a major risk for European economic policy, the ECB does not need to take immediate action in response to any potential outcomes.

Schnabel also advocated for a cautious approach to monetary policy, opposing aggressive rate cuts. She argued that inflation is unlikely to drop below the ECB’s 2% target, supporting the case for gradual rate adjustments. This view differs from that of some policymakers in southern eurozone countries who are concerned that inflation could fall too low, possibly warranting cuts below the neutral rate.

She also defended a cautious approach to monetary policy, arguing against aggressive rate cuts. Schnabel maintained that inflation is unlikely to fall below the ECB’s 2% target, supporting the case for gradual rate reductions. This perspective contrasts with some policymakers from southern eurozone countries who have suggested that inflation risks falling too low, potentially necessitating cuts below the neutral rate.

Her colleague, the Bundesbank President Joachim Nagel, argued that the central bank is nearing success in its fight against inflation, though some final steps remain. Echoing the sentiments of his French counterpart, Nagel pointed to persistently high inflation in services, currently at 3.9%, as a particular concern. He emphasised the need for close monitoring, noting that services represent the largest component in the consumer price basket.

As both the Fed and ECB weigh their next moves, EUR/USD’s trajectory is likely to be influenced by broader economic conditions. With the US economy currently outperforming the eurozone, the USD could maintain its strength in the near to medium term. A Trump victory in the upcoming election could provide additional support for the USD.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further losses may push the EUR/USD to its October low of 1.0760 (October 23), paving the way for a test of the round level at 1.0700 before the June low of 1.0666 (June 26).

On the upside, the 200-day SMA at 1.0868 leads, followed by the preliminary 100-day and 55-day SMAs at 1.0934 and 1.1021, respectively. The 2024 peak of 1.1214 (September 25) is followed by the 2023 top of 1.1275 (July 18).

Meanwhile, the pair's outlook should shift to bullish if EUR/USD clears it in a sustainable fashion.

The four-hour chart reveals some breaking out of the recent consolidative fashion. Nonetheless, the initial support level is at 1.0760, followed by 1.0666. On the positive side, the first barrier lies at 1.0871, followed by 1.0954 and 1.0996. The relative strength index (RSI) increased beyond 62.