EUR/USD is muted on hawkish Fed decision but still a knife-wielding

EUR/USD Forecast:

  • The euro lacks conviction against the US dollar on Thursday, moving between small gains and losses
  • The Fed’s tight monetary policy outlook could reinforce the bearish bias of the EUR/USD in the near term
  • This article takes a look at the key technical levels for the EUR/USD pair to watch for the coming days

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Most Read: The Federal Reserve raised interest rates by 75 basis points to curb inflation. What’s next for gold, the US dollar and bitcoin?

The EUR/USD pair lacked conviction on Thursday, moving between small gains and losses, which are likely to be constrained by rising US Treasury yields a day after the Federal Reserve approved another big increase and vowed to continue tightening monetary policy aggressively to curb inflation. At the time of writing, the exchange rate has pulled back sharply from the overnight session high at 0.9907 and is largely stable today around 0.9843, sitting near one of its lowest levels in more than two decades.

Although the euro appears to be oversold against the US dollar, the outlook remains bearish, with little positive catalysts on the horizon. From a fundamental point of view, the dynamics of the US bond market will continue to be a headwind for carry currencies. For context, earlier in the day, interest rates on US Treasuries rose to new multi-year highs, with two-year and 10-year notes rising to 4.15% and 3.70%, respectively.

The Fed’s tough roadmap, which suggests a final rate of 4.6% in 2023 and involves about 150 basis points of additional tightening, along with its pledge to maintain a restrictive stance for an extended period of time, should keep US interest rates skewed. towards the upside. , to boost the dollar’s momentum in the foreign exchange space.

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While the European Central Bank is also raising borrowing costs to combat strong inflationary pressures in the region, its response has been comparatively less aggressive due to higher deflationary risks for the bloc arising from the energy crisis after Russia weaponized its natural gas supplies. Thus, monetary policy divergence has also worked against the Euro.

Focusing on macro variables, the economic outlook is rapidly deteriorating for both the US and Europe, but the North American country is in a much better position to withstand high winds. Recent data appears to confirm this assessment, with Eurozone consumer confidence for September dropping to -28.8, an all-time low amid deep pessimism. In this environment, the EUR/USD will struggle to make a sustainable recovery.

Another major threat to high betas these days is market sentiment. If the likelihood of a global recession increases significantly in the near term, risky assets such as stocks and cryptocurrencies are likely to extend their slump in 2022, prompting traders to add defensive positions. In periods of extreme turmoil and flight to safety, the US dollar tends to outperform most of its peers. All this indicates that the euro is not in a good position.




from clients long net.




from clients short net.

change in

Longs

shorts

OI

daily -2% -3% -2%
weekly 14% -37% -5%

Technical analysis of the EUR/USD pair

After the recent slide, the EUR/USD pair fell to multi-decade lows, a sign that bears are firmly entrenched in the driving seat. If the pair fails to make a rebound and decisively restore the 0.9900 area in the coming days, the selling momentum may accelerate with the bulls rescued, paving the way for a decline towards the 0.9670 area. With further weakness, focus shifts to directing support near 0.9559. On the flip side, if we see a sustained move above 0.9900, the next resistance appears just one touch above the parity mark as shown in the chart below.

EUR/USD Technical Chart

EUR/USD chart created using TradingView

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— By Diego Coleman, Market Strategist, DailyFX

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