EUR/USD Forecast: Euro stays dangerously close to key support area ahead of Fed
- EUR/USD trades near the lower limit of its weekly range.
- The Fed is widely expected to leave its policy settings unchanged following the July meeting.
- EU inflation and US ADP Employment Change data will also be featured in the economic calendar.
EUR/USD struggles to gain traction early Wednesday and continues to fluctuate in a narrow channel slightly above 1.0800 after posting small losses on Tuesday.
Euro PRICE This week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the weakest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.37% | 0.26% | -1.29% | 0.04% | 0.65% | -0.58% | -0.23% | |
| EUR | -0.37% | -0.15% | -1.67% | -0.31% | 0.32% | -0.96% | -0.57% | |
| GBP | -0.26% | 0.15% | -1.56% | -0.19% | 0.47% | -0.80% | -0.43% | |
| JPY | 1.29% | 1.67% | 1.56% | 1.30% | 1.98% | 0.71% | 1.15% | |
| CAD | -0.04% | 0.31% | 0.19% | -1.30% | 0.65% | -0.64% | -0.24% | |
| AUD | -0.65% | -0.32% | -0.47% | -1.98% | -0.65% | -1.25% | -0.89% | |
| NZD | 0.58% | 0.96% | 0.80% | -0.71% | 0.64% | 1.25% | 0.38% | |
| CHF | 0.23% | 0.57% | 0.43% | -1.15% | 0.24% | 0.89% | -0.38% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
Eurostat will release the Harmonized Index of Consumer Price (HICP) data, the European Central Bank's preferred gauge of inflation, in the European session. Markets expect the core HICP to rise 2.8% on a yearly basis in July, following the 2.9% increase recorded in June. Nevertheless, this data is unlikely to trigger a market reaction unless it diverges from the market consensus in a noticeable way.
In the second half of the day, the ADP Employment Change data will be featured in the US economic docket. Investors see the employment in private sector rising 150,000 in July, matching June's increase. Ahead of the Federal Reserve's (Fed) policy announcements, however, market participants could remain reluctant to take large positions based on this data.
The Fed is widely expected to leave the monetary policy setting unchanged following the July 30-31 policy meeting.
The CME FedWatch Tool shows that an interest rate cut in September is fully priced in. Additionally, markets see a stronger-than-60% probability that the Fed will lower the policy rate by a total of 75 basis points (bps) by the end of 2024. In case Fed Chairman Jerome Powell pushes back against this market expectation, citing strong growth figures and still tight labor market conditions, the immediate reaction could provide a boost to the USD and weigh on EUR/USD.
On the other hand, the market positioning suggests that there isn't a lot of room left for the USD on the downside, unless Powell adopts a very dovish tone and hints at multiple rate cuts in the last quarter of the year.
EUR/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart stays well below 50, reflecting a lack of buyer interest.
1.0810-1.0790 area, where the 100-day, 50-day and the 200-day SMAs are located, remains intact as key support ahead of 1.0740 (Fibonacci 78.6% retracement of the latest uptrend) and 1.0700 (psychological level, static level).
On the upside, first resistance aligns at 1.0840 (Fibonacci 38.2% retracement) before 1.0860 (100-period SMA) and 1.0880 (Fibonacci 23.6% retracement).
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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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.
