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EUR/USD Head & Shoulders Unravels as Fed Officials Fear Low Inflation

EUR/USD Head & Shoulders Unravels as Fed Officials Fear Low Inflation

David Song, Strategist

The head-and-shoulders formation in EUR/USD appears to be unraveling, with the pair at risk of staging a larger recovery as Federal Reserve officials adopt a cautious tone ahead of the last policy meeting for 2017.

Even though the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy, recent comments from St. Louis Fed President James Bullard and Chicago Fed President Charles Evans raises the risk of seeing a dovish rate-hike in December as officials warn of a more adverse scenario where the central bank continues ‘to raise rates and inflation stays where it is or continues to go down further away from our target and inflation expectations fall.’

Fed Fund Futures

Keep in mind, Fed Fund Futures continue to show bets for the first 2018 rate-hike to come in June especially as Chair Janet Yellen’s term is set to expire in February. Only time will tell whether current Governor Jerome Powell will keep the FOMC on course to deliver three rate-hikes per year, but the fresh forecasts coming out of the Federal Reserve may foster a bearish outlook for the greenback should a growing number of Fed officials project a more shallow path for the benchmark interest rate. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

EUR/USD Daily Chart

EUR/USD Daily Chart

Near-term outlook for EUR/USD has perked up following the string of failed attempt to break/close below the 1.1580 (100% expansion) hurdle, with the pair at risk of extending the recent series of higher highs & lows as both price & the Relative Strength Index (RSI) threaten the bearish formations from September. With that said, opposed to a head-and-shoulders, the broader formation is starting to take the shape of a bull-flag, with a break/close above the 1.1810 (61.8% retracement) to 1.1860 (161.8% expansion) region opening up the next topside target around 1.1960 (38.2% retracement) followed by 1.2130 (50% retracement).

Varying market conditions require alternative strategies as trends change. Want a better understanding of the different approaches for trading? Download and review the FREE DailyFX Advance trading guide!

--- Written by David Song, Currency Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.