Euro, EURUSD Price Outlook Talking Points
- EURUSD is in the midst of a three-day rally that’s pushed prices up to a fresh six-week-high, with a bit of resistance showing around the prior May highs in the 1.1250-1.1265 region.
- This Thursday brings an ECB rate decision that carries a wide-expectation for the bank to take on a dovish tone. This, however, has been run-over by a more aggressive theme of falling rate expectations around the US, creating considerable Dollar weakness over that three-day-span and helping to lift EUR/USD up to this fresh near-term high.
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EUR/USD Rallies to Six-Week-Highs Ahead of ECB
This Thursday brings an ECB rate decision, and the wide expectation is for the bank to take on a dovish tone towards future rate policy, largely in response to slow economic data that’s been coming out of the Euro-Zone. As an illustration of this theme, German bond yields remain pinned towards record lows, indicating the potential for continued dovish posture at the ECB and, perhaps even a consideration of future stimulus efforts at some point in the not-too-distant future.
But, over the past three trading days, that expectation for a more-dovish ECB has mattered little to EUR/USD as the pair has continued to rally after last week saw a higher-low print in the 1.11’s. Partly to blame is falling rate expectations around the United States, where markets are now pricing in a 98.3% chance of at least one rate cut by the end of the year. Odds are high for two cuts, as well, with an 80.9% chance of at least 50 basis points of softening by the end of this year. There’s even a 46.4% chance of as three cuts ahead of 2020; coming in stark contrast to the two hikes that the Fed had forecast for 2019 at last December’s FOMC meeting.
This hastening around expectations for rate cuts out of the US has taken control of near-term price action in the US Dollar and, in-turn, helped to push EUR/USD to this morning’s test of a fresh six-week-high.
EURUSD Four-Hour Price Chart
Chart prepared by James Stanley
At this point, sellers are responding to a key area of resistance on the EUR/USD chart, and this is the same zone that had come into play during the May rate decision at the Federal Reserve. This area runs from the psychological level of 1.1250 up to the May swing high of 1.1265. This was looked at last week, and a bit deeper exists another zone of interest, taken from around the April swing-highs around 1.1325. If buyers are able to stage a deeper move of strength, then the prior resistance zone from the six-month-range comes back into play, and that runs from the Fibonacci level at 1.1448 up to the 1.1500 psychological level.
EURUSD Eight-Hour Price Chart
Chart prepared by James Stanley
The Other Side of the Argument in the Euro
Last night’s RBA rate decision was a clear illustration of this theme, but rate expectations can matter far more than actual rate announcements themselves, particularly when the expected action has already been priced-in to the matter. This can produce what may appear to be contradicting results, as the RBA cut rates to a record low of 125 basis points yet the AUDUSD pair has rallied up to a fresh two-week-high.
In EURUSD, the Euro has had a bearish backdrop for quite some time while the US Dollar, at least into last week, remained very strong on the back of the ‘cleanest shirt in the dirty laundry’ theme. So, as that backdrop is shifting, focus has turned to the US Dollar as a more-dovish FOMC is getting priced-in to the equation. And if this theme is to continue, it can keep pressure on the bid for EURUSD, creating a deeper retracement to one of the resistance levels looked at above.
Key for that theme, however, will be a short-term observation of buyers coming in to protect the bid, helping to set higher-low support in the near-term move in EUR/USD. Given this morning’s push up to a fresh higher-high, a higher-low could be sought out around a prior area of resistance, such as the 1.1187-1.1212 zone that’s been-in play to varying degrees since November of last year.
EURUSD Two-Hour Price Chart
Chart prepared by James Stanley
To read more:
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
