The reaction to the Federal Open Market Committee (FOMC) interest rate decision leaves EUR/USD exposed to a near-term correction as the exchange rate snaps the series of lower highs and lows from earlier this week.
EUR/USD fails to take out the November low (1.0981) even though the Federal Reserve sticks to the status quo, and the exchange rate may consolidate over the remainder of the week as ‘the Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective.”
However, data prints coming out of the monetary union may drag on EUR/USD as the Euro Zone Gross Domestic Product (GDP) reportis anticipated to show a slowing economy.
The Euro area is expected to grow 1.1% in the fourth quarter of 2019 after expanding 1.2% for three consecutive quarters, while the Consumer Price Index (CPI) is set to reveal a slowdown in the core rate of inflation.
An uptick in the headline reading for inflation may largely be associated with transitory factors amid the weakening outlook for global growth, and indications of a slowing economy may encourage the European Central Bank (ECB) to endorse a dovish forward guidance as the Governing Council struggles to achieve its one and only mandate for price stability.
The ECB may come under pressure to further insulate the monetary union in 2020 as “the risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside.”
In turn, President Christine Lagarde and Co. may continue to implement non-standard measures even though the US and France reach a trade truce as the Governing Council “stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”
With that said, EUR/USD may exhibit a bearish behavior in 2020 amid the deviating paths between the FOMC and ECB, and the opening range for 2020 undermines the advance from the 2019 low (1.0879) as the near-term correction fails to produce a test of the August high (1.1250).
EUR/USD Rate Daily Chart
Source: Trading View
The broader outlook for EUR/USD remains tilted to the downside as the exchange rate cleared the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) during the first week of October.
The monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with monthly high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
With that in mind, the correction from the 2019 low (1.0879) may continue to unravel amid the failed attempt to test the August high (1.1250), and the bearish price action from the start of the month looks poised to persist as EUR/USD snaps the upward trend from late last year.
The Relative Strength Index (RSI) highlights similar dynamic, with the oscillator now tracking the downward trend from earlier this month.
However, EUR/USD fails to extend the series of lower highs and lows from earlier this week, with lack of momentum to test the November low (1.0981) raising the scope for a near-term correction.
Failure to break/close below the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement) may spur a move back towards 1.1050 (61.8% expansion), with the next area of interest coming in around the 1.1100 (78.6% expansion) handle.
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--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong.
