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EUR/USD finds support in 1.0800s ahead of Fed meeting

  • EUR/USD is under pressure amid fading expectations the Fed will cut interest rates early. 
  • The dot plot from the Fed’s meeting on Wednesday could show a shift from three to two cuts this year, Bloomberg reports. 
  • Such a change would probably cause more negativity for EUR/USD.
     

EUR/USD has taken a step lower and is now trading within a new range in the 1.0800s following last week’s warmer-than-expected US inflation data, which increased the probability the Federal Reserve (Fed) will need to keep interest rates higher for longer. 

Since higher interest rates attract more foreign capital inflows, this was positive for the US Dollar (USD), but negative for EUR/USD, which measures one Euro’s (EUR) buying power in USD terms. 

EUR/USD traders prepare for Fed meeting on Wednesday

EUR/USD is likely to see heightened volatility on Wednesday when the Fed concludes its March meeting, announces its policy decision and publishes its Summary of Economic Projections (SEP). It is highly unlikely the Fed will announce a rate cut at the meeting, even though that was a possibility a few weeks ago. 

“The reality is justly sinking in that the Fed is going to take its time,” says Mark Cranfield, an analyst at Bloomberg MLIV.

His view is backed up by the CME FedWatch Tool, which calculates the market-based probabilities of the Fed making rate cuts. At the time of publication it is calculating a 58% chance the Fed will make one or more 0.25% cuts by June, and 76.5% by July. This has fallen from the 80% for June registered by the tool at the beginning of the month. 

In the last SEP, the board of governors of the Fed predicted at least three 0.25% interest rate cuts in 2024 in their “dot plot”, however, Bloomberg News says there is now a material possibility that this will be reduced to only two cuts after the March meeting. Such a retrenchment would be viewed as “quite aggressive,” according to Cranfield. As such it would be likely to lead to further weakness for EUR/USD. 

“A pleasant surprise would be if the Fed were to maintain three dot-plot cuts,” added Cranfield, who suggests such a maintenance of the status quo would be bearish for USD (bullish for EUR/USD). 

July the new June

A report published by Bloomberg on Monday shows that after digesting over 900 headlines quoting Fed officials since the beginning of the year, the conclusion is that July actually comes out as more likely as the month when the Fed begins easing, rather than June. 

If this is so, market expectations will need to shift further away from June, with negative consequences for EUR/USD, all other things being equal. 

There is little major data out for the Eurozone on Monday. February Consumer Price Index data is a revision of an estimate and unlikely to deviate from the 2.6% preliminary result for headline and 3.1% for Core. 

Technical Analysis: EUR/USD hovers above abyss

EUR/USD finds a temporary support as it extends its correction from the 1.0981 March 8 high. 

The depth of the correction brings into question the sustainability of the hitherto dominant short-term uptrend. 

Euro vs US Dollar: 4-hour chart

Price is still above the pivotal 1.0867 level of the previous key swing low. This is likely to be a make-or-break level for the trend. Should prices cross below it would shift the balance of probabilities in favor of a reversal of the uptrend. 

Such a breakdown would then most probably extend to 1.0795, at the low of the B leg of the prior ABC Measured Move pattern that unfolded higher during February and early March. 

Alternatively, if the level holds, the short-term uptrend remains intact and likely to resume. Confirmation of a higher high and an extension of the uptrend would come from a break above the 1.0981 highs. 

After that, tough resistance is expected at the 1.1000 psychological level – a likely bloody battlefield for bulls and bears. 

A decisive break above 1.1000, however, would open the gates to further gains towards the key resistance level at 1.1139, the December 2023 high. 

A “decisive” break is one characterized by a long green candle piercing clearly above the level and closing near its high, or three green bars in a row, breaching cleanly above the level.

Euro FAQs

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.