The EUR Has seen a big move to the upside and we are now expecting the rally to end and a trend reversal to the downside to be confirmed. A roundup of the fundamentals technicals and sentiment below.

The rally in the Euro is based upon the market's view of interest rates as we advance with the view being the Fed will be more dovish than the ECB.

Euro v USD Interest Rate differentials

In terms of the euro, it's soared to the upside but this comparison between the Fed and ECB should be kept in mind:

The market expects the Fed to cut its interest rate by 106 basis points by the end of this year and by an additional 120 basis points before the end of next year.

In comparison, the market only expects the ECB to cut its policy rate by 65 basis point by the end of this year and by another 80 basis points before the end of next year.

“The difference in speed and magnitude amounts to about 75 basis points over the coming 14 months, and again it is pretty hard to explain such an urgent response from the Fed without economic weakness. Without an economic slowdown, the US dollar negativity looks very overdone, and even in the case of a slowdown it would have to be completely isolated to the US economy for the interest rate differential to narrow much more than what is currently priced into the market and offset the positive safe haven flow to the US dollar which is created in a risk-off environment.” (NORDEA)

Economic Outlook 

In terms of the economic outlook GDP is far stronger in the US than in the Eurozone - The Euro Area GDP expanded 0.3% on quarter in Q2 2024, and in the same period the US economy expanded an annualized 2.8% in Q2. While the US economy is slowing down from better growth than the eurozone, and arguably, the ECB needs to cut rates more than the Fed. The eurozone economy is on the verge of a recession.

Financial conditions are looser in the US than eurozone...

The market's view of a more dovish Fed than the ECB doesn't add up to us and we would expect the ECB to ease more than the market expects and the FED Less.

Sentiment 

We have large speculators moving heavily long the euro and commercial smart money hedgers selling - these positions are from last Tuesday and we would have expected both groups to have added heavily to their positions. We expect a reversal to the downside as speculators exit the market on stop. 

Technical Analysis 

Our view of the key levels of support and resistance to look out for below.