The euro-dollar pair is once again approaching the lower boundary of the broad price range between 1.1560 and 1.1730, where it has traded for three consecutive weeks. This lower bound coincides with the bottom line of the Bollinger Bands indicator on the daily chart, while the upper boundary aligns with the Kijun-sen line on the same timeframe.
On one hand, the bearish momentum appears convincing: the pair has been falling almost uninterrupted since Friday, with three straight sessions of decline. On the other hand, the market has seen similarly sharp price moves in both directions over the past two weeks, only for them to be quickly erased. Last Friday, EUR/USD closed at 1.1653. The Friday before that, it ended at 1.1622. Such price behavior suggests that it is far too early to declare the start of a new bearish trend, despite the pair's recent softness.
Notably, the dollar's strength continues to grow, even amid rising dovish expectations regarding the Federal Reserve's future policy moves. Market participants are now highly confident that the Fed will cut rates twice before the end of the year—once at the October meeting and again in December, for a total of 50 basis points. This scenario is currently priced in with over 90% probability, according to a recent Reuters poll. Out of 117 economists surveyed, 115 expect a 25-point cut in October, and 83 foresee another in December.
In addition, CME's FedWatch tool shows that the probability of another cut in January has risen to 54%.
These dovish expectations are grounded in recent Fed commentary: Fed Chair Jerome Powell and other officials (including Christopher Waller, Stephen Miran, and Michelle Bowman) emphasized concerns about labor market softness, de-emphasizing inflation concerns.
Due to the ongoing U.S. government shutdown, the September Non-Farm Payrolls (NFP) report has not been released, so markets are relying on the ADP jobs report, which showed a decline of 30,000 in private-sector employment. Likewise, inflation data has been withheld—except for one key report: the Consumer Price Index (CPI) for September, scheduled for release Friday (October 24). If the CPI misses expectations (lands in the "red zone"), markets will become even more certain that the Fed will cut rates by 75 basis points over the next four months.
So why is the U.S. dollar rallying under such an aggressively dovish macro backdrop?
The answer lies in two words: Trump and China.
Last week saw yet another escalation in the ongoing trade conflict between the U.S. and China. President Trump threatened to impose a 100% tariff on Chinese exports in response to Beijing's newly announced export restrictions. Both countries imposed additional port fees and exchanged increasingly hawkish rhetoric, marking a clear return to confrontation.
However, this initial pressure on the dollar quickly reversed when Trump abruptly changed his tone—this change acted like a spring uncoiling. The president expressed optimism about reaching a deal, praising China's "respectful" behavior and emphasizing the "massive" tariff revenue. He also stated that he intends to meet President Xi Jinping at the upcoming APEC summit in South Korea and may follow with a visit to China.
In other words, Trump once again shifted from confrontation to conciliation, reviving hopes for a deal—and that was all the dollar needed to regain strength.
But can this dollar rally be trusted under current conditions? Arguably not.
The Dollar Index (DXY) is rising on shaky ground. After all, reaching a trade deal requires more than Trump's goodwill—it also takes commitment on China's side. As the saying goes, it takes two to tango. So far, this is a one-sided political performance, with Beijing merely confirming its willingness to talk—no concrete actions yet.
It's also important to note that this time, it was China that initiated the latest controversy by imposing large-scale export restrictions on rare earth metals—key inputs in high-tech manufacturing. Given that China holds 90% of global rare earth reserves and dominates their extraction and processing, it's uncertain whether Beijing will accept a compromise in exchange for the repeal of tariffs that haven't even come into effect yet.
Taken together, these conditions suggest that the current downward momentum in EUR/USD rests on a fragile foundation.
From a technical standpoint, two major signals imply caution:
- The pair is nearing the lower boundary of the broad 1.1560–1.1730 price channel.
- The current decline lacks meaningful fundamental backing, as it is driven more by market optimism dependent on diplomacy rather than firm policy shifts or confirmed economic developments.
If the southern impulse fades within this range, long positions may once again become relevant.
Potential upside targets in case of reversal:
- 1.1660 – the middle line of the Bollinger Bands indicator on the daily chart
- 1.1710 – the upper Bollinger Band on the H4 timeframe
