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EURUSD Searches for Support as Fed Tames Bets for Rate Easing Cycle

EURUSD Searches for Support as Fed Tames Bets for Rate Easing Cycle

David Song, Strategist

EUR/USD Rate Talking Points

EURUSD trades to a fresh monthly low (1.1060) following the Federal Reserve interest rate decision, and the exchange rate may continue to search for support over the coming days as the US Non-Farm Payrolls (NFP) report is anticipated to highlight a robust labor market.

EURUSD Searches for Support as Fed Tames Bets for Rate Easing Cycle

EURUSD snaps the range bound price action from earlier this week even though the Federal Open Market Committee (FOMC) implements a 25bp reduction in the benchmark interest rate as the central bank tames speculation for a rate easing cycle.

It seems as though the FOMC is in no rush to reverse the four rate hikes from 2018 as Chairman Jerome Powell insists that the rate cut “is intended to insure against downside risks from weak global growth and trade policy uncertainty.”

The comments suggest the Fed will revert back to a wait-and-see approach as “the Committee still sees a favorable baseline outlook,” and updates to the US Non-Farm Payrolls (NFP) report may encourage Chairman Powell and Co. to strike a more balanced tone as the economy is anticipated to add another 165K jobs in July.

Image of Fed Fund futures

Little signs of a looming recession should push the FOMC to the sidelines, with Fed Fund futures now showing a greater than 40% probability that the FOMC will keep the benchmark interest rate in its current range of 2.25% to 2.50% at the next interest rate decision on September 18.

However, the Fed may come under increased pressure to adopt a more accommodative stance as President Donald Trump favors “a lengthy and aggressive rate-cutting cycle,” and it remains to be seen if the FOMC will further adjust the forward guidance for monetary policy as the central bank pledges to “act as appropriate to sustain the expansion.”

Nevertheless, waning expectations for back-to-back rate cuts may keep EURUSD under pressure, with recent price action raising the risk for a further decline in the exchange rate as it fails to preserve the range from earlier this week.

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss key themes and potential trade setups surrounding foreign exchange markets.

EUR/USD Rate Daily Chart

Image of eurusd daily chart
  • The reaction to the Fed rate cut brings the downside targets back on the radar for EURUSD as the exchange rate snaps the range-bound price action from earlier this week.
  • Recent developments in the Relative Strength Index (RSI) highlights a similar dynamic as the oscillator fails to retain the bullish formation from earlier this year.
  • The break/close below the 1.1100 (78.6% expansion) handle opens up the 1.1040 (61.8% expansion) region, with the next area of interest coming in around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).
  • Will keep a close eye on the RSI as it approaches oversold territory, with a break below 30 raising the risk for a further decline in the exchange rate as the bearish momentum gathers pace.

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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