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EUR/USD Daily Forecast – Euro at 2-Week Lows Ahead of Fed

Jignesh Davda

Market Expectations of the Fed

There will be a lot to digest from today’s Fed meeting but the main focus will be on rate guidance. The markets are pricing in about 50 basis points of cuts by the end of the year. The Fed will have a chance to confirm if they are on the same page.

Policymakers have dropped a few hints here and there, but at no point have they clearly stated they intend to deliver two rate cuts this year. For this reason, the bar is set quite high for today’s event.

I believe the Fed is very well aware of this and the turmoil that can erupt in the markets if they don’t deliver. Since they haven’t tried to reassert expectations ahead of the meeting, I am steering my bias towards an outcome where the Fed validates what the markets are assuming.

Draghi Set the Stage Yesterday

What’s made it even worse for the Fed is the dovish nature of Draghi’s speech yesterday. The euro took a dive, but it was not sustained. I think this is partly reflecting hesitation in positioning ahead of today’s Fed meeting.

Draghi has essentially opened up the downside risk for EUR/USD if the Fed comes out more hawkish than expected. In this context, I don’t think it was a coincidence that he delivered such a dovish speech a day before the Fed meeting.

Nevertheless, the Fed has a track record of trying to avoid excess volatility in the markets. This additional downside risk strengthens my conviction that policymakers are indeed looking to ease policy.

What Will Make the Dollar Drop?

It might take a lot. As mentioned, the markets have set high expectations. Will the Fed over deliver? It’s certainly possible but I have a hard time envisioning such a scenario.

A possible situation I see where the dollar makes a U-turn is if the Fed couples guidance for two rate cuts this year with restarting quantitative easing.

An Interesting Pair to Watch – EUR/JPY

Theoretically speaking, A dovish Fed stands to push up equity markets and put pressure on the dollar. A weaker dollar will support the euro which means EUR/JPY stands to gain the most due to its correlation with equities. Vice versa for a hawkish Fed, EUR/JPY stands to fall the most among the cross rates.

Technical Analysis

In yesterday’s report, I talked about how important resistance at 1.1204 is. This remains the case and it continues to be the first major upside hurdle. However, I’ll add an additional level at 1.1237. Currently, the 100 moving average is near it on a 4-hour chart. I think it will take a sustained break above the latter level to confirm a bullish reaction.

EURUSD Daily Chart

I also see some further resistance at 1.1262. On a daily chart, the 100 MA is near it and this is the same level that held the pair lower on several attempts in May, and a few in early June.

While 1.1262 can be important, the fundamental message delivered by the Fed will tend to trump any technical levels.

EURUSD 4-Hour Chart

On the downside, I see some support at 1.1176. This level held the pair higher in March. If we get below the level on the back of a hawkish take from the Federal Reserve, I would not be surprised if EUR/USD retreated further to test important support at 1.1128.

Bottom Line

  • A less dovish than expected Fed can see the pair fall all the way to 1.1128.
  • If the Fed confirms what the markets are thinking, I see potential to reach 1.1262 resistance.
  • The bar is set high for a more dovish than expected Fed meeting. But, if it happens, I expect EUR/USD will make an attempt to scale 1.1300.

This article was originally posted on FX Empire