EUR/USD Eyes August-High Again as Fed Pledges to “Respond Accordingly”

EUR/USD Eyes August-High Again as Fed Pledges to “Respond Accordingly”

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EUR/USD Rate Talking Points

EUR/USD appears to be making another attempt to test the August-high (1.1250) as the Federal Reserve pledges to “respond accordingly” to developments “that cause a material reassessment of our outlook.”

EUR/USD Eyes August-High Again as Fed Pledges to “Respond Accordingly”

The widely expected Fed rate cut spurred a limited reaction in EUR/USD, but the exchange rate quickly bounced back from the session-low (1.1080) as Chairman Jerome Powell went through the opening remarks for the press conference.

The comments from Chairman Powell offered a positive tone as Fed officials “see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth.”

However, it seems as though the FOMC will continue to respond to the shift in US trade policy as the central bank head reiterates that “weakness in global growth and trade developments have weighed on the economy and pose ongoing risks.”

In turn, the FOMC may continue to reverse the four rate hikes from 2018, and a growing number of Fed officials may project a lower trajectory for the benchmark interest rate when they update the Summary of Economic Projections (SEP) in December.

Image of Fed Fund futures

Nevertheless, Fed Fund futures reflect a greater than 80% probability the FOMC will keep the benchmark interest rate in its current threshold of 1.50% to 1.75% at the next rate decision on December 11, and it remains to be seen if Chairman Powell and Co. will revert to a wait-and-see approach as the central bank head reiterates that “policy is not on a preset course.”

Until then, headlines surrounding “phase one” of the US-China trade deal remain in focus as Chile no longer plans to host the Asia-Pacific Economic Cooperation (APEC) meetingscheduled for November 15-16.

At the same time, the European Central Bank (ECB) is scheduled to reestablish its asset-purchase program in November, and the developments coming out of the Governing Council may sway the near-term outlook for EUR/USD especially as Christine Lagarde takes the helm.

With that said, the reaction to the Fed’s forward guidance raises the scope for a larger correction in EUR/USD, with a break above the monthly-high (1.1180) opening up the August-high (1.1250).

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EUR/USD Rate Daily Chart

Image of EUR/USD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.
  • The recent correction in EUR/USD may continue to evolve amid the reaction to the Fed rate decision, with the string of higher highs and lows bringing the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) back on the radar.
  • Will keep a close eye on the Relative Strength Index (RSI) as it continues to track the upward trend carried over from the previous month and works its way back towards overbought territory.
  • A break/close above the 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) region opens up the overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion), with the next area of interest coming in around 1.1340 (38.2% expansion).

For more in-depth analysis, check out the4Q 2019 Forecast for Euro

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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