EUR/USD Daily Forecast – Euro Holds Near Two-Month High After Surprise Fed Rate Cut

The Federal Reserve delivered on what the markets were expecting yesterday – a 50 basis point cut in the interest rate. EUR/USD extended gains, although not by much, and is seen holding near highs in early trading on Wednesday.

While the markets had fully priced in yesterday’s move, several media outlets commented that yesterday’s emergency cut sparked more fears in the markets. The opposite effect that the Fed was aiming for.

Fed members Evans spoke on the matter and attempted to calm the concerns. Evans reaffirmed that the rate cut was intended to provide reassurance to businesses that the central bank was ready to provide support as needed. He went on to say that the virus will only have a ‘transitory’ impact on the economy and that he did not see any risks of overshooting inflation targets as a result of the larger than usual rate cut. He estimated the impact on growth to only be a few tenths of a percent.

Risk sentiment deteriorated following the rate cut with the S&P 500 giving back a bulk of its gain for the week thus far. However, equity markets around the globe are mostly trading higher in the early day on Wednesday.

The Fed Funds Futures pricing showed a similar pattern. The odds of further easing declined on the initial reaction from the rate cut but have since climbed higher. The latest data from the CME showed a 68% chance of at least one more rate cut by June, about 8% higher than yesterday.

The euro has several things going for it at this point. If the markets continue to price in more cuts from the Fed, the dollar is likely to see more downside. EUR/USD is already showing strong upward momentum, which might deter bears from stepping in. The pair has also climbed above notable technical resistance this week and a data release earlier today showed growth in the eurozone reaching a six-month high.

The IHS Markit composite PMI index was reported to climb to 51.6 in February, up from 51.3 in the prior month. Chief Business Economist Chris Williams commented that the eurozone showed resilience despite the rising disruptions from the Coronavirus outbreak.

Technical Analysis

There was a slight decline in upward momentum on Tuesday, although considering that the rate cut was fully priced in, this was not all that surprising.

If the markets continue to push up expectations for further rate cuts in the US, EUR/USD stands to gain. On the other hand, a recovery in risk sentiment will tend to remove the urgency for euro short-covering.

EUR/USD has rallied above it’s 200-day moving average as well as a notable horizontal level and the 100-day moving average this week. While above these technical levels, the pair remains bullish.

Major resistance is seen at 1.1225 as the level was responsible for reversing the recovery throughout the fourth quarter.

Bottom Line

• There was an initial risk-averse reaction to yesterday’s rate cut although risk sentiment appears to have once again picked up in early trading on Wednesday.
• EUR/USD is nearing a major hurdle at 1.1225 which previously served to reverse a three-month recovery.