Despite the political issues in the eurozone, the euro is not losing its bullish momentum against the U.S. dollar, and the EUR/USD pair is still on its upward trend. A Fed rate decision is the main focus for market players as it will decide the currency's next big move.
Euro Strength Despite Uncertainty in Europe
The power of the euro is not left unnoticed though political uncertainty in the eurozone. France’s sovereign credit rating was recently downgraded from AA to A+ by Fitch, due to the country's increasing debt levels. The downgrade also combines with continuing political unrest in Germany and Italy have led to worries over the eurozone economic unity.
The euro, however, has not faltered substantially. After the European Central Bank’s (ECB) most recent meeting, it has been decided that the interest rate should be kept at 2.15%, conveying the ECB’s commitment to the “higher for longer” strategy. In the eurozone, inflation is still a bit above the 2% target, which allows the ECB to keep up its tight monetary policy. As a consequence, the euro has been well supported, especially when it appears that the U.S. Federal Reserve is getting ready for a change of direction towards easing.
Dollar Weakness: The Main Reason
The EUR/USD rally of late is more or less due to the dollar weakness rather than the euro strength. The U.S. economy has been exhibiting some signs of frailty as unemployment has been on the rise and the consumer spending trend has been decelerating. The Fed's preferred inflation measure the core PCE has also been coming down, thus confirming the expectations of the rate cut.
Markets are presently assigning an 89.4% probability that a 25 basis point reduction will be announced at the FOMC meeting on Wednesday. Some experts contend that the Fed could not only go further but also potentially indicate a consecutive cut by the end of the year. This scenario of the Fed being dovish has become a factor in the dollar's heavy selling and investors have begun to divert their funds to currencies with high returns or to those that are less risky such as the euro.
Technical Setup: Bulls in Control
In technical terms, EUR/USD is still moving in a bullish trend. The pair has regularly found support at the 1.1684 1.1714 range, with buyers coming in on the declines. A breakout toward 1.1840 and maybe even 1.1900 in the medium term could be the result of a move above 1.1788 that is sustained.
Momentum gauges like RSI and MACD are giving out positive signs for bulls and price action has established a string of higher lows indicating that the upward pressure is to continue. Traders are on the lookout for a breakout confirmation that may be prompted by dovish Fed comments.
FOMC: The Deciding Factor
FOMC’s verdict and Chair Jerome Powell’s conference are what is garnering attention from everyone at the moment. The Fed’s Summary of Economic Projections (SEP) that will be released together with the decision will be providing the market with many indications about inflation, growth, and the future path of interest rates apart from the rate cut in itself.
The dollar might become more weaker along with the euro if Powell displays unease about the labor market or hints at more easing. On the other hand, a cautious or hawkish tone might disappoint the markets, leading to a short term correction in the pair.
Risks you should Watch:
The euro might gain strength from the technical and macro setup; however, risks are still there. Political instability may erupt in Europe with the influence of, for example, unexpected election results in the most important member states. Also, if U.S. inflation were to rebound or economic growth surprise to the upside, the Fed would probably decelerate its easing cycle thus pushing the dollar up.
Moreover, tensions in geopolitics especially in the East of Europe and the Middle East may be the cause of altering risk sentiment and money flows in the currency market. Traders should be prepared to move fast and keep their eyes open for the market changing news that can cause turmoil.
Conclusion
The inflection point that is critical for EUR/USD is getting closer. The bull pattern is still prevailing; technical positive aspects and policy divergence between ECB and the Fed give support to it. But the extent to which this rally will be sustained depends on the Fed’s mood and the guidance.
If Powell gives a dovish message, euro could soar to 1.18 1.20. Conversely, a brief retreat is likely as traders adjust their positions when the Fed is underwhelming. In both situations, the dip buying activity is expected to continue as participants consider any pullback a new opportunity to enter the market.
The FOMC decision is just around the corner and we are about to witness the next chapter of the EUR/USD saga which could be decisively