Sellers have dominated EUR/USD for much of the first half of the month. The highly anticipated Fed meeting, scheduled later today, stands to change that, however, the bar has been set high.
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.
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.
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.
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.
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.
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.
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.
Jignesh has 8 years of expirience in the markets, he provides his analysis as well as trade suggestions to money managers and often consults banks and veteran traders on his view of the market.