The near-term advance in EURUSD appears to be unraveling as the European Union nominates International Monetary Fund (IMF) Managing Director Christine Lagarde to replace European Central Bank (ECB) President Mario Draghi, but the broader outlook for the Euro Dollar exchange rate remains constructive as it breaks out of the downward trend from earlier this year.
It seems as though the upcoming transition at the ECB is spurring speculation for a more accommodative policy in Europe as Ms. Lagarde insists that “the global economy has hit a rough patch” while speaking at the Group of 20 (G20) summit.
The comments suggest the ECB will continue to support the monetary union under the new leadership, and the Governing Council may show a greater willingness to implement more non-standard measures over the coming months as the central bank struggles to achieve its mandate for price stability.
In turn, ECB officials may show a greater willingness to implement a negative interest rate policy (NIRP) for the Main Refinance Rate, its flagship benchmark for borrowing costs, with the Euro at risk of facing headwinds over the coming months as the Governing Council “stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.”
However, the Governing Council may keep monetary policy on auto-pilot ahead of President Draghi’s departure as the central bank prepares to launch another round of Targeted Long-Term Refinance Operations (TLTRO) in September, and the Federal Reserve interest rate decision on July 31 may largely influence the near-term outlook for EURUSD as Chairman Jerome Powell and Co. are widely expected deliver a 25bp rate cut.
Fed Fund futures continue to show a 100% probability for a reduction in the benchmark interest rate as the Federal Open Market Committee (FOMC) alters the forward guidance for monetary policy, and it remains to be seen if the central bank will reverse the four rate hikes from 2018 as President Donald Trump tweets “we need rates cuts, & easing.”
With that said, the Non-Farm Payrolls (NFP) report may do little to impact the monetary policy outlook, and current market conditions may keep EURUSD afloat over the coming days as the exchange rate struggles to extend the series of lower highs and lows from earlier this week.
EUR/USD Rate Daily Chart
Keep in mind, the broader outlook for EURUSD is no longer tilted to the downside as both price and the Relative Strength Index (RSI) break out of the bearish formations from earlier this year.
As a result, EURUSD stands at risk for a larger correction as it breaks out of the range-bound price action from May following the failed attempt to test the 1.1000 (78.6% expansion) handle, with the exchange rate clearing the 200-Day SMA (1.1335) for the first time since in over a year.
The pullback from the June-high (1.1412) appears to be stalling ahead of the Fibonacci overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion) as EURUSD struggles to extend the series of lower highs and lows from earlier this week, with a move back above 1.1340 (38.2% expansion) bringing the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region on the radar.
Next area of interest comes in around 1.1430 (23.6% expansion) to 1.1450 (50% retracement), which lines up with the March-high (1.1448), followed by the 1.1510 (38.2% expansion) to 1.1520 (23.6% expansion) zone.
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--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong.