EUR/USD Rate Outlook Hinges on FOMC Forward-Guidance

Fundamental Forecast for USD: Bullish

EURUSD Talking Points

The EUR/USD rebound following the European Central Bank (ECB) meeting appears to have stalled ahead of the Federal Reserve interest rate decision, and the failed attempt to test the monthly-high (1.1409) may bring the downside targets back on the radar as both price and the Relative Strength Index (RSI) continue to track the bearish trends from earlier this year.

The Federal Open Market Committee (FOMC) interest rate decision takes center stage even though the central bank is widely expected to keep the benchmark interest rate on hold as Fed officials are tasked with updating Summary of Economic Projections (SEP).

FOMC Chart

The fresh updates may show a further reduction in the growth and inflation outlook as the FOMC warns ‘that ‘some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, and the committee may show a greater willingness to abandon the hiking-cycle ‘in light of global economic and financial developments and muted inflation pressures.’

Moreover, the SEP may no longer reflect a threat for above-target inflation as ‘participants noted that market-based measures of inflation compensation had moved lower in recent months,’ and the central bank may continue to alter the forward-guidance to reflect a more accommodative stance as mixed data prints coming out of the U.S. economy spur fears of a looming recession.

Fed Chart

Moreover, the FOMC may also unveil plans to taper the $50/month in quantitative tightening (QT) as Chairman Jerome Powell asserts that ‘the Committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff, and a material adjustment in the monetary policy outlook may produce headwinds for the U.S. dollar amid indications of a policy error.

The sudden and abrupt shift in the Fed’s forward-guidance suggests the central bank may have done too much in 2018 after delivering one rate-hike per quarter, and Fed officials may adopt a more cautious tone over the coming months especially as the Trump administration struggles to reach a trade deal with China.

With that said, the U.S. dollar may face a bearish fate should the FOMC shows a greater willingness to abandon the hiking-cycle, but it remains to be seen if Chairman Powell & Co. will show a material revision in the interest rate dot-plot as Fed officials pledge to be ‘data dependent.’ In turn, ongoing projections for a longer-run interest rate of 2.75% to 3.00% may benefit dollar bulls, with recent price action in EUR/USD warning of range-bound conditions as the exchange rate snaps the series of higher highs & lows from earlier this week. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

Looking for a technical perspective on the US Dollar? Check out the Weekly USD Technical Forecast.

EUR/USD Daily Chart

EURUSD Chart

Keep in mind, the broader outlook for EUR/USD remains tilted to the downside as both price and the Relative Strength Index (RSI) track the bearish trends from earlier this year, but the exchange rate may continue to consolidate over the coming days as the recent rebound in the exchange rate fails to generate a run at the monthly-high (1.1409).

Lack of momentum to break/close above the 1.1340 (38.2% expansion) pivot brings the Fibonacci overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion) back on the radar, with a break/close below the stated region raising the risk for a move back towards 1.1190 (38.2% retracement) to 1.1220 (7.86% retracement), which sits just above the yearly-low (1.1176).

Additional Trading Resources

For more in-depth analysis, check out the 1Q 2019 Forecast for EUR/USD

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Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019

— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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