Post-ECB EURUSD Rate Outlook Hinges on FOMC Forward Guidance

EUR/USD Rate Talking Points

EURUSD appears to be stuck in a narrow range following the European Central Bank (ECB) meeting, but Federal Reserve interest rate decision may fuel a more meaningful rebound in the exchange rate as Chairman Jerome Powell & Co. are widely expected to alter the path for monetary policy.

Post-ECB EURUSD Rate Outlook Hinges on FOMC Forward Guidance

EURUSD bounces back from a fresh monthly-low (1.1101) as the ECB shows little indications for an imminent rate cut, and the recent remarks suggest the central bank will stick to the sidelines at the next meeting on September 12 as the Governing Council prepares to launch another round of Targeted Long-Term Refinance Operations (TLTRO) in September.

It seems as though the ECB is in no rush to push monetary policy into unchartered territory as the officials mull the “nuances” associated with its non-standard measures, but it seems as though the Governing Council will continue to endorse a dovish forward guidance as the Governing Council “stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

In fact, it may be only a matter of time before the ECB implements a negative interest rate policy (NIRP) for the Main Refinance Rate, its flagship benchmark for borrowing costs, as President Mario Draghi steps down at the end of October, and the upcoming change in leadership may produce headwinds for the Euro as the central bank struggles to achieve its one and only mandate for price stability.

With that said, the Euro stands at risk of facing headwinds over the coming months, but the Federal Open Market Committee (FOMC) interest rate decision on July 31 is likely to influence the near-term outlook for EURUSD as Chairman Powell and Co. are widely anticipated to alter the path for monetary policy.

Fed Fund futures still reflect a 100% probability for at least a 25bp reduction even though the US Gross Domestic Product (GDP) report offers little evidence of a looming recession, and the Fed’s forward guidance for monetary policy may keep EURUSD afloat if the central bank shows a greater willingness to reverse the four rate hikes from 2018.

However, an “insurance cut” may keep EURUSD under pressure, with the Dollar at risk of facing a more bullish fate ahead of the Non-Farm Payrolls (NFP) report as market participants scale back bets for a rate easing cycle.

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EUR/USD Rate Daily Chart

• Keep in mind, the broader outlook for EURUSD is no longer tilted to the downside as both price and the Relative Strength Index (RSI) break out of the bearish formations from earlier this year.
• In turn, EURUSD stands at risk for a larger correction as it breaks out of the range-bound price action from May following the failed attempt to test the 1.1100 (78.6% expansion) handle.
• It seems as though EURUSD is marking anther failed attempt to test the 1.1100 (78.6% expansion) handle following the ECB meeting, but need a move above the 1.1140 (78.6% expansion) region to bring the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) on the radar.
• Next area of interest comes in around 1.1340 (38.2% expansion) followed by the overlap around 1.1390 (61.8% retracement) to 1.1400 (50% expansion).

For more in-depth analysis, check out the 3Q 2019 Forecast for Euro

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.