EUR/USD surges to critical level as dollar continues retreat ahead of Fed

The US dollar has been increasingly pressured in the past several days, as it has retreated partly due to concerns that US Presidential Candidate Donald Trump has been gaining on his opponent Hillary Clinton. These concerns have helped to weigh on the greenback and sharply boost the EUR/USD currency pair up to a critical level.

Arguably more pressing for the dollar in the longer-term than the unfolding Clinton/Trump political drama, however, is the monetary policy stance of the US Federal Reserve. There are two more scheduled Fed meetings before the end of the year, one of which occurs this afternoon. The Fed currently appears very close to raising interest rates after having postponed a rate hike continuously since the last time the Fed raised rates in December 2015. During its most recent meeting in September, the Fed kept rates unchanged once again, but was unusually divided in opinion among voting members. Three dissenters who voted for a quarter-point rate hike resulted in the most divided Fed meeting since the end of 2014. 

It is highly unlikely that the Fed will raise rates today, as the increasingly heated US presidential race next week poses too much of an event risk. With only a 7% probability of a rate hike today, according to the Fed Fund futures market, there are very few expectations for any action on the part of the Fed. Rather, most important will be how the Fed sees interest rates going forward, especially in December. Any further division in the ranks of Fed voters will also be crucial in determining the trajectory of monetary policy. These conditions should be gleaned from today’s FOMC statement and will help decide the short-term fate of the US dollar. Any more indications of urgency on the part of the Fed to raise interest rates in December should help slow and potentially reverse the recent dollar slide. Alternatively, if Fed Chair Janet Yellen reiterates her recent comments regarding the Fed allowing a “high-pressure economy” without immediately raising interest rates, could signal a lower-for-longer policy stance and a potential extension of the dollar’s slide.

From a price perspective, EUR/USD has surged on a much-weakened dollar to hit a major resistance level around the 1.1110-area. This level is also where the currency pair broke down below a triangle chart pattern around three weeks ago. In addition, the current level is also where the key 50-day moving average is currently situated. Depending on how the Fed’s statement moves the dollar today, this will continue to be the main level to watch. A EUR/USD breakout above the current resistance on any Fed dovishness should be capped by further upside resistance around the 1.1200 level. A more hawkish Fed, in contrast, could prompt a EUR/USD turn-down from the current resistance and a move back down towards major support around the 1.0950 level.

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