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EUR/USD pares the advance from earlier this week despite the renewed risk of a U.S. government shutdown, and the exchange rate may continue to face range-bound conditions over the remainder of the year following the failed attempt to test the November-high (1.1500).

Recent remarks from the Federal Reserve suggest the central bank will continue to embark on its hiking-cycle even though U.S. President Donald Trump tweets that ‘there will be a shutdown that will last for a very long time’ as the updates to the Summary of Economic Projections (SEP) ‘show growth continuing at healthy levels, the unemployment rate falling a bit further next year, and inflation remaining near 2 percent.’

It seems as though the Federal Open Market Committee (FOMC) remains committed in pushing the benchmark interest rate towards the longer-run forecast of 2.75% to 3.00% as the central bank achieves its dual mandate, and the hawkish forward-guidance may keep the U.S. dollar bid in 2019 as Fed officials show no intentions of abandoning the hiking-cycle.

Image of fed fund futures

However, the uncertainty surrounding fiscal policy accompanied by the ongoing threat of a U.S.-China trade war may sway the economic outlook as Fed officials ‘see growth moderating ahead,’ with Fed Fund Futures now highlighting a greater than 60% probability Chairman Jerome Powell & Co. will stick to the sidelines throughout the first-half of 2019.

Waning expectations for an imminent rate-hike may continue to produce headwinds for the U.S. dollar as the period of policy normalization appears to be coming to an end, but the diverging paths for monetary policy continues to cast a long-term bearish outlook for EUR/USD especially as the European Central Bank (ECB) remains in no rush to move away from the zero-interest rate policy (ZIRP). Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

EUR/USD Daily Chart

Image of eurusd daily char

The failed attempt to test the November-high (1.1500) may generate range-bound conditions for EUR/USD, but recent developments in the Relative Strength Index (RSI) instill a long-term bearish outlook for the exchange rate as the oscillator pulls back from trendline resistance and continues to track the bearish formation from earlier this year.

In turn, the 1.1510 (38.2% expansion) region may keep EUR/USD capped going into 2019, with a break/close below the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region raising the risk for a move towards 1.1290 (61.8% expansion).The near-term support zone comes in around 1.1220 (78.6% retracement), which largely lines up with the yearly-low (1.1216).

For more in-depth analysis, check out the Q4 Forecast for the Euro

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.