Q4 2024 EUR/USD Outlook: Will the Fed Deliver as Many Rate Cuts as the ECB?

Federal Reserve in the Spotlight

In September, the Federal Reserve cut interest rates for the first time since the Covid pandemic back in March of 2020. The 50-basis point cut comes amid rising concerns about strains in the labor markets and the possible structural impacts of prolonged elevated levels of borrowing costs.

FOMC Summary of Economic Projections

Source: FOMC

The FOMC’s latest Summary of Economic Projections (September), highlighted the committees’ expectations for slightly softer-growth in 2024 as unemployment rises and inflation eases. Chair Powell’s commentary on a “recalibrating” of policy has fueled expectations for further rate cuts into the close of the year, driving the US Dollar Index to the lowest levels of the year. Note that the central bank's interest rate dot plot shows a marked reduction for the appropriate level of rates into 2024 & 2025 from the last update in June.

FOMC Interest Rate Dot Plot

Source: FOMC

As of late-September, markets are still pricing a 75% chance the Fed will cut another 75 basis points before the close of the year. The 25-basis point differential between what the central bank is projecting does leave some room for the US dollar to gain a foothold. With two interest rate decisions left from the FOMC and the ECB in a more lax easing cycle, the question is whether the US Dollar will be able to stabilize into the close of the year. That said, the technical outlook for Euro suggests that the moment of truth is forthcoming, and the bulls will face the first real test into the start of Q4.

Euro Price Chart – EUR/USD Monthly

Chart Prepared by Michael Boutros, Sr. Technical Strategist; EUR/USD on TradingView

Euro is trading within the confines of an ascending pitchfork formation extending off the 2022 low with the 25% parallel offering support for the past two-years. The focus is on a reaction into major resistance hurdles just higher with a breach / close above the 2008 trendline (red) ultimately needed to suggest a more significant low is in place / larger trend reversal is underway. It’s the moment of truth for the bulls into multi-year trend resistance.

Key resistance objectives are eyed at the 61.8% retracement of the of the 2021 decline at 1.1275 and the 61.8% extension of the 2022 advance at 1.1523-note that the median-line converges on this threshold into the close of the year and represents an area of interest for possible topside exhaustion / price inflection IF reached. Ultimately, a breach / weekly close above this threshold would be needed to fuel the next major leg towards initial objectives at the 78.6% retracement at 1.1747 and the highlighted Fibonacci confluence around the 1.20-handle.

Euro Price Chart – EUR/USD Weekly

Chart Prepared by Michael Boutros, Sr. Technical Strategist; EUR/USD on TradingView

A closer look at the weekly chart shows EUR/USD breaking out of a year-long consolidation pattern off the 2023 high with the August breach also clearing the objective 2024 opening-range. The technical implications suggest the risk for a Q4 exhaustion high and puts added significance on this upcoming test of multi-year resistance.

Initial support rests with the objective yearly-open / December high-week close (HWC) at 1.1038 and is backed closely by the January HWC at 1.0942- note that this level converges on multi-month channel support into the October open and losses would need to be limited to this slope for the June uptrend to remain viable. Broader bullish invalidation is now set to the 52-week moving average (currently ~1.0836) with a weekly close below the yearly low-close / LWC at 1.0641/77 ultimately needed to put the bears in control.

Bottom Line: A breakout of the yearly opening-range in EUR/USD is within striking distance of major resistance at a multi-year downtrend- the focus of the Q4 open is on a reaction into this zone IF reached. From a trading standpoint, losses should be limited to 1.0942 IF price is heading for a breakout on this stretch with a close above 1.1275 needed to fuel the next leg higher.

Note that seasonal tendencies since the 2008 high in EUR/USD slightly favor the bulls and although the average performance in Q4 is just +0.17%, the average gain tops 3.9% while the average loss is near -2.75%. It’s also worth noting that the December seasonals are slightly better with an average performance of +1.1%. The implication from a trading standpoint, is for possible corrective action off resistance early in the quarter to give way to a rebound off support into the yearly close. For now, all eyes are on a response at multi-year technical resistance.

-- Written by Michael Boutros, Sr. Technical Strategist

Follow Michael on X: @MBForex