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Dovish ECB Forward Guidance to Keep EUR/USD Rate Under Pressure

Dovish ECB Forward Guidance to Keep EUR/USD Rate Under Pressure

2018-05-23 19:15:00
David Song, Strategist

EURO TALKING POINTS

EUR/USD sits near the fresh 2018-low (1.1676) following the limited reaction to the Federal Open Market Committee (FOMC) Minutes, and the exchange rate may continue to work its way towards the November-low (1.1554) should the European Central Bank (ECB) cast a dovish forward guidance for monetary policy.

Image of daily change for major currencies

DOVISH EUROPEAN CENTRAL BANK (ECB) FORWARD GUIDANCE TO KEEP EUR/USD RATE UNDER PRESSURE

image of daily change for EURUSD

The FOMC Minutes suggests the central bank will continue to implement higher borrowing-costs over the coming months as ‘it would likely soon be appropriate for the Committee to take another step in removing policy accommodation,’ but the central bank appears to be in no rush to alter the monetary policy outlook as ‘it was premature to conclude that inflation would remain at levels around 2 percent.’

Image of Fed Fund Futures

With that said, it seems as though the Federal Reserve will tolerate above-target price growth for the foreseeable future as ‘a temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective,’ and Chairman Jerome Powell and Co. may continue to tame bets for an extended hiking-cycle as ‘the federal funds rate was likely to remain, for some time, below levels that they expected to prevail in the longer run.

Meanwhile, the account of the ECB meeting may reveal the central bank’s intention to buy more time as ‘measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend.’ The Governing Council may merely stick to the current script as ‘an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term,’ and more of the same from President Mario Draghi and Co. may keep the Euro under pressure as the central bank remains reluctant to conclude its easing-cycle.

EUR/USD DAILY CHART

Image of EURUSD daily chart
  • Recent price action in EUR/USD keeps the downside targets on the radar as it struggles to push to fresh yearly lows, with the pair at risk for a further decline as long as the Relative Strength Index (RSI) holds below 70 and pushes deeper into oversold territory.
  • Need a break/close below the 1.1670 (78.6% expansion) to 1.1680 (50% retracement) region to open up the November-low (1.1554), with the next area of interest coming in around 1.1390 (61.8% retracement).

For more in-depth analysis, check out theQ2 Forecast for the Euro

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--- Written by David Song, Currency Analyst

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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