- EUR/USD has extended its bearish trend following Fed's policy announcements.
- Technical outlook shows that the pair is extremely oversold in the short term.
- EUR/USD could fall to its weakest level since July 2020 if 1.1200 support fails.
EUR/USD has met heavy selling pressure in the late American session on Wednesday and fell to its lowest in more than two months. With the greenback continuing to outperform its rivals, the pair stays on the back foot early Thursday and closes in on the 17-month low it set at 1.1186 on November 24.
FOMC Chairman Jerome Powell's hawkish remarks lifted US Treasury bond yields late Wednesday and allowed the dollar to gather strength.
Although the Fed hasn't made any changes to its plan to end the QE in early March, Powell said that they will look at balance sheet reduction after the rate lift-off. The chairman further noted that policymakers were in favour of hiking the policy rate at the next meeting and added that the inflation situation was now worse than it was in December. Additionally, Powell said that they had "quite a bit of room" to raise rates without damaging the labour market.
The CME Group's FedWatch Tool shows that markets are now pricing a more-than-60% chance of the Fed hiking its policy rate by 50 basis points by May.
Later in the session, the US Bureau of Economic Analysis will release its first estimate of the annualized GDP growth in the fourth quarter. The market expectation is for the US economy to expand by 5.4% following a 2.3% growth in the previous quarter. A reading near the market forecast should help the US Dollar Index extend its rally. On the other hand, a disappointing print could limit the dollar's gains, at least in the near term. Nevertheless, the policy divergence between the Fed and the European Central Bank should continue to favour the dollar over the euro regardless of the market reaction to the GDP report.
EUR/USD Technical Analysis
EUR/USD is trading within a touching distance of the 1.1200 psychological level. In case this support turns into resistance, the pair could face additional bearish pressure and touch its weakest level in 18 months near 1.1180. Below that level, 1.1170 (static support from Jul. 2020) aligns as the next support before sellers can target 1.1100 (psychological level).
1.1250 (static level, former support) now acts as the first technical resistance ahead of 1.1270 (static level, former support) and 1.1300 (psychological level).
With the Relative Strength Index (RSI) indicator on the four-hour chart showing extremely oversold conditions below 30, a technical correction could be witnessed in the short term but the bearish bias should stay intact unless the pair reclaims 1.1300.
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