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EUR/USD Losses to Persist Amid Shift in Federal Reserve Rhetoric

EUR/USD Losses to Persist Amid Shift in Federal Reserve Rhetoric

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EUR/USD Rate Talking Points

EUR/USD extends the decline triggered by the better-than-expected ISM Non-Manufacturing survey, and the exchange rate may continue to give back the advance from the yearly-low (1.0879) as a growing number of Federal Reserve officials show a greater willingness to revert to a wait-and-see approach.

EUR/USD Losses to Persist Amid Shift in Federal Reserve Rhetoric

EUR/USD fails to preserve the advance following the Fed rate cut, and the monthly opening range fosters a bearish outlook for Euro Dollar amid the failed attempt to test the October-high (1.1180).

Recent remarks from Federal Reserve officials suggest the central bank will retain the current policy throughout the remainder of the year as Chicago Fed President Charles Evans, a 2019 voting member on the Federal Open Market Committee (FOMC), asserts that “the economy is in a good place now.”

At the same time, New York Fed President John Williams, a permanent voting member on the FOMC, insists that “monetary policy is moderately accommodative,” and it seems as though the central bank will move to the sidelines after delivering three consecutive rate cuts as committee is “focused on to get the level of interest rate to the level we think that is best to achieve our dual mandate objectives.”

Image of Fed Fund futures

In fact, Fed Fund futures show a greater than 90% probability for the FOMC to keep the benchmark interest rate at 1.50% to 1.75% in December, and the central bank may refrain from reversing the four rate hikes from 2018 as the US and China look to sign “phase one” of the US-China trade deal over the coming days.

In turn, Chairman Jerome Powell and Co. may largely endorse a wait-and-see approach going into 2020, but it remains to be seen if Fed officials will adjust the interest rate dot-plot when the central bank updates the Summary of Economic Projections (SEP) amid the weakening outlook for global growth.

Nevertheless, the recent shift in Fed rhetoric appears to be heightening the appeal of the US Dollar, and the near-term correction in EUR/USD may continue to unravel as the FOMC tames speculation for another rate cut in 2019.

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 EUR/USD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.
  • The recent correction in EUR/USD appears to be coming to an end as the advance from the yearly-low (1.0879) fails to produce a run at the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement)
  • At the same time, the monthly opening range fosters a bearish outlook for EUR/USD amid the lack of momentum to test the October-high (1.1180).
  • As a result, a break/close below 1.1040 (61.8% expansion) may spur a move back towards the 1.0950 (100% expansion) to 1.0980 (78.6% retracement) region, with the next area of interest coming in around 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement).
  • Will keep a close eye on the Relative Strength Index (RSI) as it approaches trendline support, with a break of the upward trend offering a bearish signal.

For more in-depth analysis, check out the 4Q 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.