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EUR/USD Snaps Narrow Range on Powell Testimony; Euro-Zone CPI on Tap

EUR/USD Snaps Narrow Range on Powell Testimony; Euro-Zone CPI on Tap

2018-02-27 16:00:00
David Song, Strategist
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FX Talking Points:

- EUR/USD Snaps Narrow Range on Powell Testimony; Euro-Zone CPI on Tap.

- New Zealand Dollar Outlook Mired by Narrow Bets for 2018 RBNZ Rate-Hike.

DailyFX TableEUR/USD Table

EUR/USD slips to fresh weekly lows following the semi-annual testimony with Fed Chairman Jerome Powell, and fresh developments coming out of the euro-area may spark a further decline in the exchange rate as the core rate of inflation is expected to slow to an annualized 1.2% from 1.3% in January.

Fed Fund Futures

It seems as though the Federal Open Market Committee (FOMC) is on course to deliver three rate-hikes in 2018 as Chairman Powell notes that ‘further gradual increases in the federal funds rate will best promote attainment of both of our objectives,’ and the hawkish rhetoric may keep the dollar afloat over the coming days as the central bank is widely expected to deliver a 25bp rate-hike in March.

At the same time, signs of subdued price growth may dampen the appeal of the single-currency as it encourages the European Central Bank (ECB) to further expand its balance sheet, and President Mario Draghi and Co. may stick to the sidelines at the next meeting on March 8 as inflation continues to run below the central bank’s target.

However, recent comments from Bundesbank President Jens Weidmann suggests the Governing Council will continue to alter the monetary policy outlook over the coming months, which would includea bit more specificity with respect to the interest-rate guidance,’ and the broader shift in EUR/USD man continue to unfold in 2018 as the ECB appears to be on track to conclude its quantitative easing (QE) program in September.

Nevertheless, recent price action raises the risk for a further decline in EUR/USD as it snaps the narrow range from earlier this week, with the pair at risk for a more meaningful correction especially as the Relative Strength Index (RSI) fails to preserve the bullish formation carried over from the previous year.

EUR/USD Daily Chart

EUR/USD Daily Chart

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  • Downside targets are coming back on the radar for EUR/USD following the failed attempt to test the 1.2640 (61.8% expansion) to 1.2650 (38.2% retracement) region, with the Relative Strength Index (RSI) still deviating with price as it extends the bearish formation from earlier this month.
  • Need a break/close below 1.2230 (50% retracement) to favor a move back towards 1.2130 (50% retracement), with the next downside region of interest coming in around 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion).
NZD/USD Table

NZD/USD is back under pressure even as New Zealand Finance Minister Grant Robertson argues ‘a strong New Zealand dollar reflects a strong economy,’ and the pair may continue to give back the rebound from earlier this month amid the failed attempt to test the 2017-high (0.7558).

The remarks from Mr. Robertson is likely to deter the Reserve Bank of New Zealand (RBNZ) from lifting the cash rate off of the record-low as the central bank looks for a weaker exchange rate, and acting-Governor Grant Spencer may continue to endorse a wait-and-see approach at his last meeting on March 22 as ‘there has been little sign of domestic inflation picking up, even though spare capacity has been absorbed over a number of years.

Moreover, incoming Governor Adrian Orr may take a similar approach as ‘wage inflation has remained below average,’ with NZD/USD at risk of exhibiting a more bearish behavior over the near-term especially as the New Zealand Institute of Economic Research (NZIER) now anticipates the RBNZ to start normalizing monetary policy in early-2019 versus late-2018.

In turn, the recent rebound in NZD/USD may continue to unravel, with the downside targets coming back on the radar as the advance from the November-low (0.6780) appears to have finally run its course. Recent developments in the Relative Strength Index (RSI) also instills a bearish outlook for NZD/USD as the oscillator continues to deviate with price and extends the downward trend from earlier this year.

NZD/USD Daily Chart

NZD/USD Daily Chart

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  • Broader outlook for NZD/USD remains capped by the key resistance-zone around 0.7520 (50% retracement) to 0.7530 (78.6% retracement), with the pair at risk for a more meaningful correction as both price and RSI snap the bullish formations from earlier this year.
  • Break/close below the 0.7240 (61.8% retracement) to 0.7260 (38.2% retracement) region raises the risk for a move back towards 0.7170 (50% retracement) to 0.7200 (38.2% retracement), with the next downside region of interest coming in around 0.7040 (50% retracement) to 0.7100 (38.2% expansion).
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--- Written by David Song, Currency Analyst

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