EUR/USD outlook: July highs back in play ahead of Fed decision

• EUR/USD nears July highs
• Momentum signals bullish bias
• Fed decision key for direction

EURUSD Outlook Summary

EUR/USD is now within touching distance of setting fresh multi-year highs, continuing to grind higher ahead of the Federal Reserve interest rate decision later in the week. With the U.S. interest rate outlook more influential on the pair’s recent movements than yield differentials or shifts in outright European yields, whether the Fed can meet or exceed dovish market pricing may determine whether a retest of the July highs sinks or swims.

EUR/USD Tests Final Hurdle before July Highs

Having traded in a sideways range for more than a month following the release of the July U.S. nonfarm payrolls report at the start of August, the latest leg higher kicked off following a bounce from the intersection of the 50-day moving average and uptrend running from the August lows, delivering a bullish key reversal candle on the daily. The signal proved to be a reliable one, seeing EUR/USD push higher in the subsequent days, testing the July 24 high of 1.1788 in Asia on Tuesday.

Source: TradingView

 

 

That’s the first topside level of note, with a clean break above putting the pair on a potential collision course with the July high of 1.1832. Should EUR/USD fail at 1.1788, uptrend support is found at 1.1700 today. Considering the coiling pattern of recent weeks resembles a bear wedge, a break of the latter points to a possible deeper flush, putting the 50-day moving average, 1.1600 support, or even the July swing low in play.

Momentum indicators favour upside over downside, with RSI (14) continuing to trend higher above 50, a bullish signal confirmed by MACD which has already staged a bullish crossover in positive territory. The message is one of building bullish momentum, improving the odds of topside breaks sticking.

While the European calendar is relatively busy on Tuesday, most events screen as noise rather than signal when it comes to near-term directional risks. What’s more important for EUR/USD is today’s U.S. retail sales report and the Fed interest rate decision on Wednesday. With markets priced for the funds rate to bottom around 3% this cycle, it may require either the Fed to communicate a need to push rates into stimulatory territory—which seems unlikely—or a definitive signal from U.S. economic data that activity is rolling over, to spark a meaningful leg higher for the euro.