EUR/USD Up After Fed Hike but Skating on Thin Ice, ECB Guidance Key to Outlook
- EUR/USD rose modestly after the Federal Reserve announced its July monetary policy decision
- The Fed resumed its tightening campaign after a brief pause last month, raising interest rates by 25 basis points to 5.25%-5.50%, but did not strike a hawkish tone
- Market attention now turns to the ECB, with the bank’s decision and guidance key to the trajectory of the euro
The U.S. dollar took a turn to the downside on Wednesday following the July FOMC announcement. Although the Fed raised interest rates by 25 basis points to 5.25%-5.50%, it did not adopt an aggressive outlook, with Chairman Powell refraining from definitively signaling further policy firming. The overall tone drove Treasury yields lower, pushing EUR/USD towards the 1.1100 handle.
The euro's gains, however, could be short-lived if the European Central Bank embraces a conciliatory stance at the end of its next meeting. For context, the institution led by Christine Lagarde is seen lifting borrowing costs by a quarter point on Thursday, but forward-guidance could shift in a dovish direction in the face of the deteriorating health of the economy in the region.
If ECB fails to commit to another rate rise and takes up a data-dependent approach, traders may begin to increase wagers that the hiking cycle is over, pricing out the probability of more tightening in September. This could trigger a sharp downward correction in the euro, causing the common currency to erase part of its 2023 rally.
From a technical standpoint, EUR/USD is currently squeezed between resistance at ~1.1100 and support at ~1.1015. These two zones should be watched closely in the coming days to see which way prices resolve after the dust settles following several high-impact events on Thursday and Friday that could produce outsize moves.
In the event of a bullish breakout, buying momentum could accelerate, paving the way for a rally toward 1.1180, followed by 1.1275, the 61,8% Fibonacci retracement of the 2021/2022 selloff. On further strength, the focus shifts to 1.1375. On the flip side, if EUR/USD heads lower and breaches support at 1.1015, we could see a drop toward 1.0950 and 1.0830 thereafter.
EUR/USD TECHNICAL CHART
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