FX.co ★ EUR/USD: Can We Trust the Downward Momentum?

The EUR/USD pair continues to trade within the range of 1.1580–1.1650, which lies between the middle line of the Bollinger Bands and the lower boundary of the Kumo cloud on the daily chart. Last week, buyers of EUR/USD attempted to break through the upper boundary of the range, but to no avail: sellers seized the initiative, and Friday's trading ended at the 1.1620 mark. As the new trading week begins, sellers are trying to build on their success, moving toward the lower boundary of the aforementioned range. However, fundamentally, the pair remains stuck in a sideways move, awaiting key macroeconomic reports due this week.

On Monday, the price retreat is attributed to rising geopolitical tensions amid the diplomatic scandal between Japan and China. Briefly, a sharp escalation in relations followed the statement by Japanese Prime Minister Takaichi on the potential use of collective self-defense in the event of a crisis over Taiwan. This prompted strong reactions from Beijing, both diplomatically and from the Ministry of Defense.

An unexpected surge in risk-averse sentiment has provided indirect support for the greenback, which remains a safe-haven asset. The U.S. dollar index has returned to the 99 level, reflecting increased demand, and the EUR/USD pair is again testing the 15 level.

Additionally, in anticipation of the upcoming release of September's Non-Farm Payrolls, the market has seen a weakening of the dovish expectations regarding further actions from the Federal Reserve. According to the CME FedWatch tool, the likelihood of a rate cut at the Fed's December meeting is currently just 44%. For comparison, this likelihood reached 95% before the Fed's October meeting.

There are a few reasons for this shift. First, several Fed officials have emphasized inflation risks, thereby supporting a wait-and-see approach. Among them are Susan Collins, Lori Logan, Jeff Schmid, Beth Hammack, and Raphael Bostic.

The second reason for the weakening dovish expectations is the information vacuum. Market participants seem to have "remembered" the outcomes of the October Fed meeting, during which the central bank cut interest rates. Despite the dovish scenario being implemented, the dollar strengthened across the market, reacting to Jerome Powell's rhetoric. The essence of this rhetoric was that the Fed is "feeling its way" in the context of the shutdown and will have to "slow down." Furthermore, according to Powell, more of his colleagues tend to favor a pause for at least one meeting before the next round of rate cuts.

In other words, the Fed has effectively cast doubt on the prospects for a December rate cut, not because of macroeconomic signals, but because there are none.

And while the shutdown has ended, the prospects for the December meeting remain highly uncertain, as the BLS is unlikely to publish key macroeconomic reports for October. At least, a White House spokesperson has indicated that this is a possibility. The Bureau of Labor Statistics has announced that only September's Non-Farm Payrolls (release expected on November 20) will be published. As for the October data, everything remains uncertain, with BLS representatives stating they need time "to fully assess the situation." Many analysts are confident that the October Non-Farm Payrolls will not be published.

Will the Fed cut interest rates in December based solely on the September report, or will it prefer to wait for November-December data? This question remains open. According to the CME FedWatch indicator, the market seems to lean towards the Fed adopting a wait-and-see position at least until January 2026.

The pair is still trading within the 1.1580–1.1650 range. Bearish sentiment dominates today, but traders seem cautious and are not rushing to open large positions.

In my view, this caution is quite justified, given the fragility of the current situation. For example, political/geopolitical factors inherently "do not last long" without continuous informational support. The diplomatic conflict between Japan and China will not be an exception. Japan announced it aims to lower the temperature of the conflict and is sending one of its foreign ministry officials to Beijing. According to several experts, neither Japan nor China is interested in seriously damaging their relations, so the political conflict is likely to de-escalate soon. This fact could help reduce risk-averse sentiment in the markets.

Regarding the weakening of dovish expectations, it is still early to draw any definite conclusions. If the September Non-Farm Payrolls turn out to be "weaker than weak forecasts" or even negative (reminder: the ADP report for September came in at -29,000), conversations about potential additional monetary easing at the December meeting will resurface. The probability of a rate cut could rise to 60% or possibly even 70%.

Thus, the downward dynamics of EUR/USD are justified but only "in the moment." The pair is declining on shaky grounds that do not lend themselves to sustainable declines.

From a technical standpoint, the pair on the D1 timeframe is located between the middle and upper lines of the Bollinger Bands, below the Kumo cloud, on the Kijun-sen line, but above the Tenkan-sen line. This signals ongoing uncertainty. If the downward momentum fades around the 1.1580 mark (the middle line of the Bollinger Bands on the daily chart), long positions may again become relevant—albeit within the price range of 1.1580–1.1650.