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EURUSD Weakness to Persist on Less-Dovish Fed Rhetoric

EURUSD Weakness to Persist on Less-Dovish Fed Rhetoric

2019-08-21 06:50:00
David Song, Currency Strategist
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EURUSD struggles to retain the recovery from earlier this month as the Bundesbank warns of an economic “slump,” and the exchange rate may continue to give back the advance from the August-low (1.1027) as a growing number of Federal Reserve officials tame speculation for a rate easing cycle.

After dissenting against the July rate cut, Boston Fed President Eric Rosengren, a 2019-voting member on the Federal Open Market Committee (FOMC), insists that the central bank needs “to be careful not to ease too much” as the US economy shows little signs of a looming recession.

Image of Atlanta Fed GDPNow forecast

In fact, the Atlanta Fed’s GDPNow model forecasts the US economy to expand 2.2% in the third quarter of 2019, but the ongoing shift in trade policy may spur a growing dissent within the FOMC as the committee comes under pressure to reverse the four rate hikes from 2018.

It remains to be seen if Chairman Jerome Powell will try to sway market expectations as the central bank head is scheduled to speak at the Kansas City Fed Economic Symposium in Jackson Hole, Wyoming, and a batch of less dovish comments should keep EURUSD under pressure as the central bank resists calls to reverse the four rate hikes from 2018.

EUR/USD Rate Daily Chart

Image of EURUSD Daily Chart

Source: Trading View

Keep in mind, the broader outlook for EURUSD is clouded with mixed signals as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with the 1.1100 (78.6% expansion) handle no longer offering support.

The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator fails to retain the upward trend from earlier this year, with the indicator now tracking a bearish formation.

As a result, the rebound from the monthly-low (1.1027) may continue to unravel amid the string of failed attempts to close above the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement).

Need a break/close below 1.1040 (61.8% expansion) to open up the downside targets, with the next area of interest coming in around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).

However, failure to test the monthly-low (1.1027) may generate range-bound conditions ahead of the Fed symposium, with a move back above 1.1140 (78.6% expansion) opening up the overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement).

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For more in-depth analysis, check out the 3Q 2019 Forecast for the Euro

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--- Written by David Song, Currency Strategist

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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