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EUR/USD Breaks Out as Fed Officials Endorse Wait-and-See Policy

EUR/USD Breaks Out as Fed Officials Endorse Wait-and-See Policy

David Song, Strategist

EUR/USD finally clears the November-high (1.1500) as a growing number of Federal Reserve officials show a greater willingness to adopt a wait-and-see approach, and the exchange rate may stage a larger correction over the coming days as it breaks out of the range-bound price action from late-2018.

The Federal Open Market Committee (FOMC) Minutes suggest the central bank is in no rush to implement higher borrowing-costs as ‘a number of participants noted that, before making further changes to the stance of policy, it was important for the Committee to assess factors such as how the risks that had become more pronounced in recent months might unfold and to what extent they would affect economic activity, and the effects of past actions to remove policy accommodation, which were likely still working their way through the economy.’

It seems as though the FOMC will retain the current policy at the next interest rate decision on January 30 as ‘changes in financial conditions appeared to reflect greater concerns about the global economic outlook,’ and the central bank may stick to the sideline throughout the first-half of the year as Fed Fund Futures reflect little expectations for an imminent rate-hike.

Image of federal reserve interest rate forecast

However, the FOMC may stay on track to push the benchmark interest rate towards the projected longer-run forecast of 2.75% to 3.00% as the committee achieves the dual mandate for monetary policy, and Chairman Jerome Powell & Co. may retain the flexibility to implement higher interest rates as ‘members judged that some further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

In turn, the FOMC may take longer to complete the hiking-cycle as the government shutdown clouds the economic outlook, and limited bets for an imminent rate-hike may continue to sap the appeal of the dollar as the linger threat of a U.S.-China trade war fuels the downside risk for global growth. 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 chart

The near-term outlook for EUR/USD has become more eventful as the exchange rate finally takes out the November-high (1.1500), with the close above the 1.1510 (38.2% expansion) hurdle opening up the Fibonacci overlap around 1.1640 (23.6% expansion) to 1.1680 (50% retracement). Next region of interest comes in around 1.1810 (61.8% retracement), which largely lines up with the September-high (1.1815).

For more in-depth analysis, check out the 1Q 2019 Forecast for the Euro

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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

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