Expect EUR/USD Dip Buyers This Week Into Wednesday’s Fed Meeting
As we head into a critical week for the financial markets, EUR/USD traders should prepare for potential buying opportunities. The European Central Bank (ECB) met last week, holding back on providing a clear signal about rate cuts for October, leaving the market leaning more positive on the euro. Meanwhile, the Federal Reserve, led by Jerome Powell, is gearing up for a crucial policy decision on Wednesday. Traders should be aware of several factors at play as we move closer to that meeting.
ECB Caution: A Limited Window for Action
The ECB’s hesitance to telegraph an immediate rate cut reflects its limited manoeuvring space. With inflation still elevated and economic growth fragile, the ECB is under pressure to maintain a delicate balance. While the Fed has the flexibility to be aggressive in its cuts, the ECB appears more constrained. This could keep EUR/USD bought on the dips as markets perceive the ECB’s monetary policy stance as more hawkish compared to the anticipated Fed’s dovish pivot.
However, the market’s focus is now shifting towards the Federal Reserve and its decision this week and the narrative has now shifted.
Fed’s Shifting Focus: How Deep Will the Cuts Go?
The narrative around the Fed has evolved significantly. It’s no longer a question of whether the Fed will cut by 25 or 50 basis points, but rather how deep the cuts will go and how long they will last. Markets are increasingly speculating that Powell and the FOMC could initiate a more aggressive easing cycle to counteract slowing economic conditions. This shift in sentiment is creating a clear EUR/USD dip buying bias ahead of Wednesday’s Fed meeting.
Why?
The dollar tends to weaken when the Fed signals deeper and prolonged rate cuts, as lower interest rates reduce the currency’s yield advantage. This provides an opportunity for EUR/USD buyers to step in, particularly when the pair dips near key technical levels.
Key Levels to Watch: 1.103 as a Critical Support Zone
The 1.103 level is one such critical for EUR/USD traders this week. This price zone represents last week’s high and may act as a support level, seeing there is a weekly reversal candle in place. With the Fed meeting looming, dip buyers are likely to step in if the pair pulls back to this level. If 1.103 holds, we could see renewed buying momentum as traders position for potential dollar weakness following the Fed’s decision.
Market Sentiment: Risk and Uncertainty Remain High
Although dip buyers may be favoured into the meeting, it’s important to remember that market sentiment can shift quickly. Any surprises in the Fed’s tone or actions could dramatically alter the landscape. A more cautious or unexpectedly hawkish Powell could strengthen the dollar, putting EUR/USD buyers under pressure once again.
For now, though, the combination of ECB hesitation and Fed dovishness suggests that EUR/USD remains a buying opportunity, particularly on dips into 1.103 or just below, as traders prepare for Wednesday’s critical Fed meeting.