Key Talking Points:
- EUR/USD rejects bearish momentum at 1.17
- Dot-plot revision to garner increased attention
EUR/USD has been packed in tightly between two key kevels (1.1700/38) since the open on Sunday night. Yesterday’s market meltdown saw the US Dollar pick up some defensive bets but the pair still manages to keep above 1.17, avoiding a false breakout like the one seen in August. The last few times the pair has been in this area it has been successful in bouncing back higher towards 1.18, with the correction extended until 1.19 when EUR/USD pushed below 1.17 momentarily.
EUR/USD Daily chart
But with the risk-aversion that has set off the week and defensive positioning towards the Fed’s meeting on Wednesday, we may see EUR/USD struggle to consolidate momentum above the current area of support. There is also the risk that Evergrande fails to meet scheduled interest payments on its USD bonds on Thursday, which may spark another wave of safe-haven demand into the Dollar.
The Fed isn’t expected to announce any major policy changes tomorrow but markets will remain highly sensitive to any mention of a change coming soon. Powell will likely set out to convince investors that a reduction in asset purchases does not carry a direct signal on the timing of rate hikes, and an updated dot plot chart will likely be his tool. The question is whether the data we’ve seen since June will have tilted the Fed to become more hawkish, with a possibility of 3 rate hikes in 2023 rather than just 2 projected in the June dot-plot.
Some may also be expecting a rate hike to creep into the last quarter of 2022 but I would expect the Fed to air on the side of caution and try and avoid a hawkish shock in markets, cause at the end of the day its easier to add a hike in 2022 in the next dot-plot than to undo an already expected hike.
With regards to EUR/USD, a close below 1.17 at the end of the week would be bearish for the pair, with 1.1624 as the next key area. The RSI has attempted to pick up some renewed bullish momentum but the likelihood of a break above 1.1740 is looking pretty slim. I would expect to see some sideways action within the current range in today’s session with a bearish tilt heading into tomorrow’s meeting.
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— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
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