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EURUSD Rebound to Benefit from Growing Bets for September Fed Rate Cut

EURUSD Rebound to Benefit from Growing Bets for September Fed Rate Cut

David Song,
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EUR/USD Rate Talking Points

EURUSD extends the rebound from the yearly-low (1.1027) as the US-China trade truce comes to an end, and current market conditions may fuel a larger rebound in the exchange rate as the ongoing shift in trade policy puts pressure on the Federal Reserve to insulate the economy.

EURUSD Rebound to Benefit from Growing Bets for September Fed Rate Cut

EURUSD retraces the decline following the Federal Reserve interest rate decision as China pledges to counteract the new wave of US tariffs, and the weakening outlook for global growth may continue to influence the monetary policy outlook as the central bank pledges to “act as appropriate to sustain the expansion.”

The 164K expansion in US Non-Farm Payrolls (NFP) may offer the Federal Open Market Committee (FOMC) little relief as the US “will start, on September 1st, putting a small additional tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China.”

Image of Fed Fund futures

The growing threat of a trade war may push the FOMC to alter the forward guidance ahead of the next interest rate decision on September 18 as Fed Fund futures now reflect a 100% probability for at least a 25bp reduction, and the central bank may come under pressure to reverse the four rate hikes from 2018 as US President Donald Trump favors a “a lengthy and aggressive rate-cutting cycle.”

In turn, market participants may pay increased attention to the fresh comments from St. Louis Fed President James Bullard and Chicago Fed President Charles Evans as the 2019 FOMC voting members are schedule to speak over the coming days, and a batch of dovish comments may generate a larger rebound in EURUSD as theshift in trade policy puts pressure on the FOMC to implement lower interest rates.

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EUR/USD Rate Daily Chart

Image of eurusd daily chart
  • Keep in mind, the reaction to the FOMC rate cut undermines the broader outlook for EURUSD as the exchange rate clears the May-low (1.1107), with the 1.1100 (78.6% expansion) handle no longer offering support.
  • The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator fails to retain the bullish formation from earlier this year.
  • However, EURUSD carves a fresh series of higher highs and lows following the failed attempt to close below the 1.1040 (61.8% expansion) area, with a break/close above 1.1140 (78.6% expansion) raising the risk for a run at the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement).

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.