The "marionette" model appears in the foreign exchange market! Euro and Federal Reserve pricing touch extreme correlation

Huitong Financial APP News-Euro/US dollar is highly correlated with Federal Reserve interest rate expectations, and the correlation is close to extreme levels. As U.S. data flow remains limited and both major central banks are in wait-and-see mode, the pair may maintain a consolidating trend before important data is released. On Wednesday (November 12), the EUR/USD fluctuated within a narrow range around 1.1575, after the currency pair strengthened for five consecutive trading days.
The pair's performance near key resistance points to the possibility of a breakthrough, but the market remains cautious until a clearer signal emerges.
Federal Reserve interest rate expectations dominate the foreign exchange market
In the past month (especially the most recent week), the EUR/USD has been highly synchronized with market expectations for the Federal Reserve's interest rate cut by the end of 2026.
The rolling correlation coefficient in the right pane of the figure below shows that the correlation values for the past 5, 10 and 20 days have reached 0.94, 0.72 and 0.84 respectively-which indicates that there is a significantly strong correlation between the two variables, and the correlation far exceeds the impact of the U.S. long-term yield or the direct spread between Europe and the United States on the foreign exchange market during the same period. For euro/dollar traders, this means that any event that triggers significant swings in the Fed's expectations deserves attention.
Although the expected end of the U.S. government shutdown means important economic data can be seen as early as next week, before these volatile events, apart from the intensive speeches of Fed officials, there is almost nothing on the U.S. agenda that can affect interest rate expectations.
Considering that these officials, like the market, have no access to official data to judge the path of interest rates, whether their remarks can really bring real surprises is debatable.
While ECB policy currently appears to be on autopilot, the equally intensive speech schedule of ECB officials is more likely to create noise than effective signals.
Comprehensive research and judgment show that before the market welcomes important U.S. data, the foreign exchange market may enter a sideways consolidation stage-unless an unexpected event occurs that materially changes the Fed's policy outlook. This also reminds us that we need to be extra vigilant when dealing with price signals before the market regains clear guidance.
Viewed from the daily chart, the EUR/USD is currently moving closely to the downtrend line formed from the September high. The exchange rate briefly broke through this resistance level in the past two days, but failed to stand firm, and the bears temporarily pushed it back below the trend line. However, considering that support at the 1.1550 level below is not far away, the market vaguely predicts significant volatility is on the horizon.
Short-term price signals may remain bullish, suggesting that a breakthrough is more likely to go up rather than down.Both RSI (14) and MACD indicators support this view: the former is gradually returning to the neutral level of 50, while the latter has completed the low gold cross and started to rise. Although it does not constitute a clear strong long signal, it is enough to warn bears that downward momentum is rapidly fading.
On the upside side, if the exchange rate effectively breaks through and closes above the September trend line, it will strengthen bullish momentum, and subsequent targets can look towards 1.1650, 50-day moving average (MA, 1.1661) or 1.1780.
On the downside, if the exchange rate falls below the 1.1550 support, it may inject momentum into short-term short positions, with the target pointing to the November low of 1.1468 or the August 1 swing low of 1.1391.
(Daily chart of EUR/USD, source: Yihuitong)At 14:26 Beijing time,EUR/USDtraded at 1.1577/78.