EUR/USD Halts Losing Streak Ahead of Fed Testimony But Will It Last?

EUR/USD Rate Talking Points

EUR/USD attempts to retrace the decline following the US Non-Farm Payrolls (NFP) report, but the semi-annual testimony with Federal Reserve Chairman Jerome Powell may drag on the exchange rate if the central bank head tames speculation for lower interest rates.

EUR/USD Halts Losing Streak Ahead of Fed Testimony But Will It Last?

EUR/USD bounces back from the monthly low (1.0942), with the exchange rate halting a five day losing streak, and recent price action raises the scope for a larger rebound as Euro Dollar fails to extend the string of lower highs and lows from the previous week.

However, the Humphrey-Hawkins testimony with Chairman Powell may keep EUR/USD under pressure as the Federal Open Market Committee (FOMC) appears to be in no rush to alter the monetary policy outlook.

In turn, Chairman Powell may endorse a wait-and-see approach in front of US lawmakers as the FOMC insists that the “current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market, and inflation returning to our symmetric 2 percent objective.”

More of the same from Chairman Powell may spur a bullish reaction in the US Dollar as the central bank moves away from its rate easing cycle, and the FOMC may merely attempt to buy time at the quarterly meeting in March as “there are some signs that global growth may be stabilizing after declining since mid-2018.”

Image of Fed Fund futures

In fact, Fed Fund futures show a 90% probability the FOMC will keep the benchmark interest rate in its current threshold of 1.50% to 1.75% on March 18, and it remains to be seen if Chairman Powell and Co. will alter the forward guidance when they update the Summary of Economic Projections (SEP) as Fed officials see US interest rates on hold over the next 12 months.

With that said, the diverging paths between the FOMC and the European Central Bank (ECB) may continue to produce headwinds for EUR/USD as President Christine Lagarde emphasizes that the “Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.

As a result, EUR/USD may continue to give back the rebound from the 2019 low (1.0885) as it clears the November low (1.0981), but the exchange rate may stage a larger rebound ahead of the Fed testimony as it halts the series of lower highs and lows from the previous week.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with monthly high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • With that in mind, the correction from the 2019 low (1.0879) may continue to unravel amid the failed attempt to test the August high (1.1250), and the bearish price action from the start of February may persist as the Relative Strength Index (RSI) continues to track the downward trend from earlier this year.
  • The break/close below the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement) opens up the 2019 low (1.0879), but recent price action raises the scope for a larger rebound in EUR/USD as it fails to extend the string of lower highs and lows from the previous week.
  • At the same time, the bearish momentum appears to be abating as the RSI reverses course ahead of oversold territory, with a move above the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement) bringing the 1.1040 (61.8% expansion) region back on the radar.

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— Written by David Song, Currency Strategist

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