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A Fed Rate Cut Supports Bullish Euro Technical Outlook

Wednesday, 29 October 2008 05:26:35 GMT  |  John Rivera, Currency Analyst

The FOMC is expected to cut rates by 50 bps bringing the overnight rate down to %1.00. Easing of this depth is almost always bearish for the local currency and we expect the same reaction for the dollar today.

Fundamental Outlook
The FOMC is expected to cut rates by 50 bps bringing the overnight rate down to %1.00. Easing of this depth is almost always bearish for the local currency and we expect the same reaction for the dollar today. Although many feel that the reduction will not add any significant impact to the current problems given the amount of liquidity that has been pumped into the financial system. However, markets are expecting such a move and Chairman Bernanke has yet to disappoint them. Euro technical outlook is calling for further gains for the EURUSD A return of risk appetite has sent the dollar lower and after yesterday’s second largest gain in the Dow’s history we expect to see the bullish momentum continue into the European markets which will continue to lend Euro support. However, be aware that once the Fed eases traders will focus on the upcoming easing of the ECB. If the Fed follows the decision with a hawkish statement then we could see the EURUSD quickly reverse its gains.

Technical Outlook

The Euro has finally shown renewed signs of life against the US Dollar, and a noteworthy correction is consistent with our earlier calls for a short-term retracement. We wrote this morning, “Weekly RSI on the EUR/USD is now at its most bearish extreme since the inception of the Euro, and support at 2006 lows is the only worthwhile price floor above 1.2145. Given such extreme readings on weekly oscillators and a recent flip in EUR/USD sentiment, a short-term recovery seems the more likely outcome for the Euro/US Dollar pair.” Shorter-term, the EUR/USD will encounter resistance at the 61.8 percent retracement of the 1.3010-1.2330 move at 1.2750, and a break above would leave the pair open for a retest of the psychologically significant 1.3000 mark.

For More Technical Analysis Visit the Daily Technical Report

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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