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Euro Forecast: EUR/USD Selloff Stalls Ahead of Fed Rate Decision

Euro Forecast: EUR/USD Selloff Stalls Ahead of Fed Rate Decision

David Song, Strategist

Euro Talking Points

EUR/USD bounces back from a fresh yearly low (1.0471) after depreciating for six consecutive days, but the Federal Reserve interest rate decision is likely to sway the exchange rate as the central bank is widely expected to normalize monetary policy at a faster pace.

Fundamental Forecast for Euro: Neutral

EUR/USD appears to be reversing course ahead of the 2017 low (1.0340) as the core US Personal Consumption Expenditure (PCE) Price Index narrows to 5.2% from a revised 5.3% per annum in February, and data prints coming out of the Euro Area may fuel a larger rebound in the exchange rate as Germany’s Unemployment report is anticipated to show a further improvement in the labor market.

Euro Forecast: EUR/USD Selloff Stalls Ahead of Fed Rate Decision

Unemployment in Germany, Europe’s largest economy, is anticipated to fall 15k in April after contracting 18K the month prior, and a positive development may encourage the European Central Bank (ECB) to adjust the forward guidance for monetary policy as a growing number of Governing Council officials show a greater willingness to switch gears.

Euro Forecast: EUR/USD Selloff Stalls Ahead of Fed Rate Decision

However, the Federal Open Market Committee (FOMC) rate decision on May 4 may largely influence EUR/USD as the central bank is widely expected to deliver a 50bp rate hike, and it remains to be seen if Chairman Jerome Powell and Co. will embark on quantitative tightening (QT) as the “Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

With that said, another FOMC rate hike along with plans to reduce the central bank’s balance sheet may keep EUR/USD under pressure as the committee normalizes monetary policy at a faster pace, but a delay in the Fed’s exit strategy may generate a near-term rebound in the exchange rate amid expectations for a looming shift in ECB policy.

--- 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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