The EUR/USD fell back along with other major FX pairs after the dollar managed to find some support ahead of the FOMC rate decision tonight. But this could be a temporary respite before the dollar selling potentially resumes. The bullish EUR/USD forecast remains intact.
So, what’s going on in FX?
The markets have been very lively of late with investor continuing to pour funds into precious metals, stocks and swapping their US dollar for commodity dollars and European currencies, most notably the Swiss franc, but also the euro and pound. And now, the hugely undervalued Japanese yen is also finding much needed love, too, partly on expectations that both Japan and the US governments want a lower USD/JPY exchange rate. These moves were amplified on Tuesday. While President Trump’s remarks that he was unconcerned by a weaker dollar caused further weakness, the greenback, was already on downward path before his comments hit the wires late in the day. If the US government is happy with a weaker currency, and the Fed is still expected to cut rates further this year, then the dollar stands ready to fall further.
EUR/USD forecast: Can the euro rise and hold above $1.20 handle?
The EUR/USD spiked to a high of 1.2083 during yesterday’s dollar meltdown, before easing back below the 1.20 handle earlier on, where it was holding at the time of writing.
The euro has been caught between crossfires. On the one hand, the ongoing dollar weakness is keeping it supported and thus is proving to be the stronger force currently. On the other hand, the risk of rising energy prices is limiting its upside potential. On this front, the US president continues to threaten military action against Iran, and this is keeping oil prices on the front foot amid concerns over any short term supply disruptions.
Meanwhile the strengthening EUR/USD exchange rate is further limiting the odds of further ECB rate cuts. This is providing a real risk to the ECB’s broadly neutral policy stance. Rising strength of the euro will increase concerns among the more dovish members that it could drag inflation below target, as cost of imports fall while exports suffer as a result of a higher exchange rate.
FOMC and tech earnings eyed
Looking ahead, the dollar sell-off could continue and may even gather pace should tonight’s FOMC meeting turn out to be a non-event or modestly dovish, given that the underlying expectations are for shift towards a pause which may therefore offer some near-term support for the dollar. However, if despite a hawkish Fed and we see the potential dollar bounce proving shallow, then that would point to very bearish underlying momentum.
After the US cash close, earnings from Meta, Microsoft and Tesla will also be in focus. Collectively, these results may provide some dollar support if the numbers are good. But any disappointments there could add further pressure to the dollar. Ahead of those tech earnings, we saw ASML delivering strong results, sending Nasdaq 100 futures to near record highs.
EUR/USD technical levels to watch
As long as EUR/USD holds above the 1.1900/20 area, marking the September high, the bullish momentum remains intact, despite today’s drop. Below that level, the point of origin of the breakout at 1.1805 will come into focus next, with 1.1770 being the last line of defence before things turn bearish again. On the upside, 1.20 is now pivotal. A move back above this level today could trigger fresh technical buying to take us back to yesterday’s high of 1.2082. Above that, round handles like $1.21 and $1.22 would come into focus next. Given the strength of the rally, I wouldn’t rule out a continuation of the upward move towards the low to mid $1.20s in the weeks ahead.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
