Markets are looking ahead to the key event this week as the Fed considers an end to its quantitative tightening (QT) efforts.
EURUSD – Daily Chart
The EUR/USD has made a small bounce from recent lows, and the week ahead will be important ahead of key support at 1.15575. Below that level, 1.1400 would be the next target.
Markets are expecting a quarter-point cut in short-term interest rates and for the Fed to announce the end of its balance sheet reductions. Chairman Jerome Powell noted the Fed’s plans to end QT at a speech on October 14.
The Fed’s decision comes as the U.S. government remains in a shutdown, and some government workers have been told that it could last until December. The shutdown is currently cutting around 0.2% from GDP growth each week. Losses also tend to rise the longer the shutdown lasts, according to KPMG. Those losses are said to have been recouped, but this one is larger than many previous shutdowns.
Analysts are predicting a slowdown in consumer spending as 750,000 government workers go without pay during the shutdown.
Alongside this, liquidity in the overnight fed funds market is drying up, which is hurting the ability of monetary policy to cut rates. Banks have been depositing money with the Fed after fears over banks returned with two high-profile bankruptcies and some selling in regional bank stocks in the U.S.
The European Central Bank is also set to announce its latest interest rate decision this week, but they have telegraphed that it will stay on hold.
The euro’s strength against the dollar has stalled recently, but traders can look for the market reaction this week to the Fed and the trade deal. That could define the currency market trend for the weeks ahead.
