- Euro to dollar analysis: EUR/USD support and resistance levels in focus
- FOMC seen delivering a hawkish hold
- Keep an eye on bond yields
The EUR/USD and other dollar pairs will be in sharp focus for FX traders as the attention turns to the upcoming Fed decision in a few hours’ time. No rate hike is expected, but the market is pricing in about even odds of another rate increase before the year is out. If this is also reflected in the updated dot plots, or implied by Powell himself, then this could lift yields and the dollar even higher. Traders will also be watching for indications of whether the FOMC’s latest projections scale back the 100 basis points of rate cuts they had penciled in for 2024, back in June. If so, this would be interpreted as a hawkish signal.
Euro to dollar analysis: EUR/USD short-term support and resistance levels to watch
Ahead of the FOMC decision, let’s take a look at some key levels on the EUR/USD.
Here’s an hourly chart of the EUR/USD that we will be watching, especially around the time the FOMC statement is released and during Powell’s press conference:
Today, the EUR/USD continued to squeeze the shorts, as rates pushed north of the 1.07 handle. The underlying bearish trend still remained intact, however. So, we are continuing to favour the downside.
EUR/USD short term resistance levels to watch
In terms of resistance, 1.0725 is an interesting level to watch which was being tested at the time of writing. This level was where the EUR/USD last broke down from on Thursday of last week, which led to rates briefly breaking the May 2023 low of 1.0635.
So, ideally, the 1.0725 level will need to hold here for the bears to maintain control.
If the squeeze continues, then 1.0750 is the next level of potential resistance ahead of 1.0780. We will drop our short-term bearish bias on this pair if the EUR/USD ends the day above 1.0800, for then it will have created a higher high.
EUR/USD short term support levels to watch
On the downside, 1.0700 is the base of today’s earlier breakout and the bulls will need to hold their ground here. If this level breaks and we move below the last low prior to the latest break higher at 1.0690ish, then that could pave the way for fresh follow-up selling pressure towards 1.0675 initially.
But our main downside objective is last week’s low around 1.0630ish, below which we think lies a big pool of liquidity – i.e., trapped bulls’ sell stop orders.
Is that where the EUR/USD could get down to later? I wouldn’t bet against it.
All eyes on the Fed and bond yields
As we have noted previously, the Fed is not expected to hike rates today but could update its dot plots to reveal less rate cuts than previously pencilled in for 2024, and potentially also highlight the possibility for one more rate increase before 2023 ends.
It is worth watching the reaction in long-dated bonds, given the renewed strength we have seen in yields, which has been driving the dollar higher and holding stocks back.
If yields continue to remain elevated, then this could be a big problem especially for longer-duration equities, those that are expected to produce their highest cash flows in the future. Many of such companies are dominated in the technology sector, putting the tech-heavy Nasdaq 100 into focus. For the EUR/USD, this would also be bearish.
-- Written by Fawad Razaqzada, Market Analyst