Loading
The year 2024 is shaping up to be a crucial one for global monetary policies, with a particular focus on the moves of the European Central Bank (ECB) and the US Federal Reserve (FED). Both institutions face unique challenges, with the common goal of navigating through an uncertain and variable economic environment.
The ECB, after a period of rate hikes to combat inflation, appears poised to reverse course. Analysts’ expectations suggest that we could see a series of interest rate cuts during 2024, with a possible overall easing of 75-100 basis points by the end of the year.
This policy shift reflects the need to stimulate a Eurozone economy that is showing signs of slowing, while at the same time trying to keep persistent inflationary pressures in check.
On the other hand, the Fed may maintain a more conservative approach. After raising rates aggressively to tackle US inflation, the US central bank may opt to keep rates high for longer, barring a significant slowdown in inflation and the economy.
However, some analysts do not rule out the possibility of modest rate cuts in the second half of 2024, if economic conditions permit.
The Euro/Dollar Exchange Rate in the Spotlight
The chart shows the Euro/Dollar exchange rate (EUR/USD) with a triangular formation in progress. This technical configuration is characterised by two converging trendlines: a descending upper and an ascending lower.
This formation is accompanied by the ADX (Average Directional Index) indicator at the bottom of the chart.
The ADX is a trend strength indicator that does not indicate the direction of the trend but its strength. ADX values below 20 indicate a market phase without a strong trend (low volatility), while values above 20 indicate a strong trend. Currently, the ADX is at 9.51, suggesting that the market is in a consolidation phase and that the strength of the trend is very weak.
ADX Considerations:
- Low Trend Strength: Such a low ADX value confirms that the market is in a compression phase, in line with the triangle formation.
- Possible Increase in Volatility: As the ADX is very low, we expect that a break-up of the triangle could lead to a significant increase in volatility and thus a decisive move in either direction.
The future direction of the exchange rate will be determined by the break of one of these two trendlines, indicating a potential bullish or bearish direction. Let’s take a deeper look at the technical situation and the underlying macroeconomic factors.
Euro/Dollar With ADX Indicator – Weekly TimeFrame – Powered by Commodity Evolution
Triangular formation: Technical Scenario
The triangle formation is a consolidation pattern that suggests a phase of indecision in the market. The triangle is formed when price oscillates between a descending and an ascending trendline.
In the specific case of EUR/USD, a bullish break out of the upper trendline could suggest a continuation of the bullish trend, while a bearish break down of the lower trendline could indicate a resumption of the bearish trend.
Influence of Interest Rates: FED vs ECB
In the chart, we can see the interest rates of the Federal Reserve (FED) and the European Central Bank (ECB). The differential between these rates plays a crucial role in determining the relative value of the two currencies.
Euro/Dollar VS Fed Rates – ECB – Weekly TimeFrame – Powered by Commodity Evolution
FED Interest Rate
Currently, the FED’s interest rate is at 5.5%, and appears to be stable. This high rate reflects a restrictive monetary policy aimed at controlling inflation in the US. A higher interest rate would make the dollar more attractive to investors, as it offers higher yields than the euro.
ECB Interest Rate
The ECB interest rate is at 4.25 per cent, with a recent decrease from 4.50 per cent at its last meeting on 3 June 2024. This relatively less restrictive monetary policy compared to the Fed may make the euro less attractive against the dollar.
Interest Rate Differential
The interest rate differential between the FED and the ECB is a key indicator for predicting the future directionality of the EUR/USD exchange rate. A larger differential in favour of the Fed tends to strengthen the dollar against the euro, while a smaller or negative differential could favour the euro.
The EUR/USD exchange rate is currently in a crucial phase, with a triangular formation indicating a potential significant turning point. The direction of the breakout of this formation will be determined by a combination of technical and macroeconomic factors.
Possible Scenarios
-
Bull Break (Bullish Scenario):
- If price breaks the upper trendline, a bullish move is likely to occur. This could be fuelled by positive economic factors for the Eurozone or a more restrictive ECB monetary policy than the Fed.
-
Bearish Break (Bearish Scenario) – Preferred by Commodity Evolution’s Research Department
- If the price breaks the lower trendline, we expect a bearish movement. This scenario could occur if the Fed decides not to cut rates and the ECB decides to continue its expansionary policy. Price targets are in the 1.0500 and 1.0300 area.
Euro/Dollar Target – Weekly TimeFrame – Powered by Commodity Evolution
If you want to stay up-to-date on the industrial world and get exclusive insights, we offer you the opportunity to try our web platform free of charge for 7 days. During this period we will provide you with the necessary assistance to help you understand which services are best suited to your needs.