EUR/USD Forecast: Cautious Fed to trigger a rebound

EUR/USD has been fluctuating in a very tight range.
The Fed is widely expected to hike its policy rate by 50 basis points.
A cautious Fed could trigger a correction in the dollar and help EUR/USD rebound.

Eren Sengezer FXStreet

EUR/USD has been having a difficult time making a decisive move in either direction since the beginning of the week with investors remaining on the sidelines while gearing up for the Federal Reserve's policy decisions.

The Fed is widely expected to announce its first 50 basis points (bps) rate hike since 2000 and confirm that it will start shrinking the balance sheet by $95 billion per month from June. Although these decisions will point to an aggressive tightening stance by the Fed, the impact on the dollar's valuation is likely to remain limited since markets have been pricing them since March. In fact, the US Dollar Index (DXY), which tracks the dollar's performance against a basket of six major currencies, is up nearly 7% since the beginning of March.

Federal Reserve Preview: Buy the dollar dip and three other scenarios as Powell shows his power.

Hence, a 'buy the rumour sell the fact' market reaction could trigger a correction in the DXY and open the door for a rebound in EUR/USD. Additionally, FOMC Chairman Jerome Powell might acknowledge the worsening economic outlook and the loss of growth momentum. In case Powell adopts a cautious tone regarding future rate hikes, the greenback is likely to come under selling pressure and help the pair push higher.

On the other hand, a mention of 75 bps rate hikes being on the table in the upcoming meetings to tame inflation could be seen as an extremely hawkish stance and boost the dollar regardless of the currency's overbought conditions.

Ahead of the Fed event, the ADP Employment Change and the ISM Services PMI data will be featured in the US economic docket but they are likely to be ignored by market participants.

EUR/USD Technical Analysis

In case EUR/USD gains traction in the second half of the day, it will need to clear 1.0560 (static level) resistance to attract buyers and extend its recovery. Above that level, 1.0600 (psychological level, 50-period SMA on the four-hour chart, Fibonacci 23.6% retracement of the latest downtrend) aligns as the next target before 1.0660 (Fibonacci 38.2% retracement).

On the downside, 1.0500 (psychological level) could be seen as first support before 1.0470 (multi-year low set on April April 26).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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