EUR/USD Forecast: Euro turns bearish ahead of Fed policy announcements
- EUR/USD entered into a consolidation phase following Tuesday's sharp decline.
- The technical outlook highlights a bearish tilt in the near term.
- The Fed is widely expected to leave the policy rate unchanged.
EUR/USD came under heavy bearish pressure in the American session on Tuesday and closed the day sharply lower. The pair stays in a consolidation phase below 1.0700 early Wednesday as markets gear up for key data releases from the US and the Federal Reserve's (Fed) monetary policy decisions.
The US Dollar (USD) started to gather strength on Tuesday after the Bureau of Labor Statistics reported that the Employment Cost Index rose 1.2% in the first quarter, above the market expectation and the previous quarter's reading of 1% and 0.9%, respectively. Additionally, the currency benefited from the selloff in major US equity indexes.
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 | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.39% | 0.16% | 0.86% | 0.99% | -0.19% | 1.02% | 0.81% | |
| EUR | -0.38% | -0.24% | 0.47% | 0.59% | -0.56% | 0.63% | 0.42% | |
| GBP | -0.14% | 0.25% | 0.72% | 0.84% | -0.32% | 0.88% | 0.68% | |
| CAD | -0.87% | -0.47% | -0.72% | 0.11% | -1.04% | 0.15% | -0.07% | |
| AUD | -1.00% | -0.60% | -0.84% | -0.12% | -1.17% | 0.03% | -0.18% | |
| JPY | 0.19% | 0.57% | 0.32% | 1.04% | 1.14% | 1.20% | 0.99% | |
| NZD | -1.03% | -0.63% | -0.88% | -0.16% | -0.04% | -1.22% | -0.21% | |
| CHF | -0.80% | -0.40% | -0.67% | 0.06% | 0.19% | -0.99% | 0.22% |
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 Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
The US economic docket will feature ADP Employment Change data for April. Markets forecast an increase of 175,000 in private sector payrolls following the 184,000 increase recorded in March. The market reaction to the ADP employment data is likely to be straightforward, with an upbeat print helping the USD edge higher, and short-lived.
Later in the session, the ISM Manufacturing PMI is expected to edge lower to 50 in April from 50.3. The preliminary S&P Global Manufacturing PMI for April declined to 49.9 and caused the USD to weaken against its rivals. In case the ISM Manufacturing PMI comes in below analysts' estimate, the USD could have a hard time outperforming its rivals.
Most importantly, the Fed will announce policy decisions and Chairman Jerome Powell will speak on the policy outlook at a press conference. The Fed is widely expected to leave the policy rate unchanged at 5.25%-5.5% range. According to Wall Street Journal reporter Nick Timiraos, the Fed will emphasize that they are prepared to hold rates steady for longer than previously anticipated, due to strong inflation readings in the first quarter of the year.
Investors will also pay close attention to possible changes to the quantitative tightening (QT) strategy. The Fed is expected to announce that they will slow the pace of QT. In case the Fed postpones this decision, citing inflation concerns, the initial reaction could provide an additional boost to the USD.
EUR/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart dropped below 50 and EUR/USD closed the last five 4-hour candles below the 20, 50 and 100-period Simple Moving Averages (SMA), reflecting the bearish shift.
On the downside, 1.0650 (static level) aligns as interim support before 1.0600 (static level) and 1.0560 (static level from November). Resistances are located at 1.0700 (Fibonacci 23.6% retracement, 100-period SMA, 50-period SMA), 1.0750 (Fibonacci 38.2% retracement) and 1.0765 (200-period SMA).
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.
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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.
