The Federal Reserve's rate cut signals a reversal! Can the euro's future trend turn around?

Last Week’s Forex Market Turmoil: Is the Dollar Weakness Here to Stay? Can the Euro Rally?

Last week (11/10-11/14), the forex market showed mixed signals, with the US Dollar Index falling 0.28%, and non-US currencies diverging. Specifically, the euro rose 0.46%, the Australian dollar gained 0.68%, the British pound increased slightly by 0.08%, while the Japanese yen depreciated 0.73%.

The most noteworthy movement was in the euro. Amid better-than-expected US employment data and the resolution of the government shutdown crisis, the EUR/USD pair showed an upward trend. What signals are hidden behind this? Will the euro go up? The answer may lie in the changing expectations of the Federal Reserve’s rate cuts.

Changing Rate Cut Expectations — US Economic Data as the Key

The US government shutdown has finally ended. On November 12 (ET), Trump signed a temporary funding bill, ending the longest government shutdown in history, which lasted 43 days. With the government back in operation, market focus quickly shifted to a series of upcoming economic data releases.

Key dates approaching: the September non-farm payroll report will be released on November 20, and on November 26, the Q3 GDP revision and October PCE Price Index will be announced simultaneously. These data are crucial for the Fed’s December rate cut decision.

Currently, market expectations for a December rate cut by the Fed have cooled significantly. According to the latest CME FedWatch Tool, the probability of a 25 bps rate cut is only 45.8%, while the chance of holding rates steady is 54.2%. This shift mainly stems from recent hawkish signals from Fed officials.

So, can the data reverse this trend? If the US labor market weakens further, it will reinforce expectations of a rate cut in December, weakening the dollar and creating room for the euro to rise against the dollar. Conversely, if employment data surprises with strength, it will dampen rate cut expectations, bolster the dollar, and put pressure on the euro.

Technical Perspective: Can the Euro Hold Its Ground?

From a technical standpoint, EUR/USD has successfully broken above the 21-day moving average, but resistance to further upward movement remains. The 100-day moving average at 1.166 is a key resistance level — a break above it could open larger upside potential. However, failure to break through could increase downside risk, with the previous low of 1.146 potentially serving as support.

Yen Depreciation Accelerates, Central Bank Policy Divergence Worsens

Unlike the euro’s rally, the Japanese yen has continued to depreciate following the appointment of new Prime Minister Fumio Kishida, with USD/JPY rising 0.73% last week. The depreciation is driven by market expectations of the Kishida government’s “fiscal easing + monetary easing” policy mix.

Kishida’s government will announce an economic stimulus package this week, estimated at about 17 trillion yen. Goldman Sachs warns that if the stimulus exceeds expectations, concerns over Japan’s fiscal discipline will persist, potentially pushing long-term sovereign bond yields to record highs and continuing to pressure the yen.

It is also noteworthy that Japanese authorities have not strengthened their stance against yen depreciation. According to analysts at Mitsubishi UFJ Morgan Stanley Securities, to avoid depleting foreign exchange reserves, Japanese officials might be willing to tolerate USD/JPY rising to around 161.

On the technical side, USD/JPY remains above multiple moving averages, with RSI indicating continued bullish momentum. In the short term, it may test the 155 level again. However, if the breakout fails, downside pressure will increase, with the 21-day moving average at 153.38 serving as support.

Focus Points for This Week

This week’s key focus areas are: the US September non-farm payroll data, the FOMC meeting minutes from October, and the November PMI data from Europe and the US. Whether the Fed’s rate cut expectations stabilize will directly determine if the euro’s rally can continue. Meanwhile, the scale of Japan’s economic stimulus plan will also influence the further movement of USD/JPY.

Conclusion: Will the euro go up? The answer depends on the Fed’s rate cut expectations. If US economic data remains weak and expectations for rate cuts increase, the euro will find support for an upward move. In the short term, technical signals remain bullish, but the 1.166 resistance level is a critical threshold. Investors should closely monitor this week’s data releases and the latest statements from Fed officials.