- EUR/USD has recovered sharply toward 1.0500 early Wednesday.
- ECB will hold an emergency meeting at 09:00 GMT to discuss the fragmentation issue.
- EUR/USD needs to flip 1.0500 into support for an extended rebound.
EUR/USD has gained traction in the early European session on Wednesday and climbed toward 1.0500. The pair holds in positive territory as investors await the European Central Bank (ECB) to hold an emergency meeting at 09:00 GMT.
The ECB will discuss the current market conditions and reportedly consider the option of reinvesting Pandemic Emergency Purchase Programme bonds to aid weaker countries.
In its policy statement last week, "in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time," the ECB noted. Although it's difficult to say how such policy action could impact the shared currency's valuation over the medium term, it is likely to have a positive impact on risk sentiment by assuring that they will not allow yield spreads to go out of control. Hence, EUR/USD could continue to push higher in the short term if the ECB brings relief to the markets.
In the second half of the day, the Federal Reserve will announce its interest rate decision. Reuters estimate points to a 50 basis points (bps) rate hike but market participants shouldn't be surprised if the Fed were to raise its policy rate by 75 bps. Earlier in the week, several news outlets claimed that FOMC policymakers were discussing a larger-than-expected hike following the hot inflation report and a large number of financial institutions revised their forecasts to include two 75 bps hikes in June and July.
Fed Preview: Powell to plunge markets or raise yields, a win-win for the dollar, five scenarios.
According to the CME Group FedWatch Tool, markets are now pricing in a 60% probability of the Fed raising its policy rate by a total of at least 200 basis points at the next three meetings. In case the Fed mentions that 100 bps rate hikes could be on the table in the upcoming meetings, that could be seen as a hawkish development and trigger another leg higher in the US Dollar Index. On the other hand, the Fed could double down on its intention to assess the situation before deciding what to do in September and cause the dollar to lose interest.
EUR/USD Technical Analysis
The Fibonacci 23.6% retracement of the latest downtrend forms first resistance at 1.0500. In case the pair rises above that level and starts using it as support, it could target 1.0540 (Fibonacci 38.2% retracement) and 1.0580 (Fibonacci 50% retracement, 200-period SMA on the four-hour chart).
On the downside, 1.0460 (20-period SMA) aligns as initial support ahead of 1.0400 (static level, psychological level) and 1.0380 (static level).
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