EUR/USD Forecast: USD bullish ahead of the FED, but uncertain destiny afterwards

The EUR/USD pair is back into bearish territory, ending the week not far from the yearly low set at 1.0504 this December, hit by the ECB's latest economic policy decision. The European Central Bank has left its rates unchanged, but introduced several changes to its easing program. First, it has extended the bond purchases program for nine more months,  to December 2017, but will be buying at a slower pace starting in April, down to EUR60bn per month from current EUR80bn. The news sent the EUR skyrocketing as investors understood the announcement as the beginning of tapering, although later in the press conference, Draghi said that they have not discussed the matter. Besides, the overall press conference was dovish, remarking the many challenges the region faces, including political ones.  Additionally, the Central Bank adjusted the parameters of its asset purchase program by decreasing the minimum remaining maturity for eligible securities from two years to one year and that  the bank could now buy securities with a yield to maturity below the interest rate on the ECB’s deposit facility.

The market quickly changed course, sending the pair down to the 1.0600 region, breaking below it on a quiet Friday, as speculative attention flipped to the upcoming FED's economic policy meeting this Wednesday. The Federal Reserve is largely expected to raise rates this upcoming week, and whilst most of it has been already priced in, investors will probably push the dollar to fresh highs if Yellen actually acts.

Technically, the daily chart shows that the pair has briefly surpassed the 38.2% retracement of the latest daily decline between 1.1299 and 1.0504, at 1.0810, a major line in the sand now for bears, but quickly resumed its slide, settling for the week below a bearish 20 SMA, and a few pips above the mentioned yearly low. The RSI indicator in the mentioned chart heads south around 39, while the Momentum indicator holds flat around 100. Still, the risk is clearly towards the downside, with a break below 1.0500 resulting in test of 1.0460, 2015 low. Below this last, the sell-off will likely accelerate with scope to fall down to 1.0300 next week.

A surprise on-hold stance for the FED will probably see the pair recovering towards the mentioned 1.0810 level, but it will take some follow through beyond 1.0840, a strong long term static resistance, to deny the ongoing bearish trend and favor further upward recoveries up to 1.0900/50.

Sentiment towards the pair, according to the FXStreet poll, is  showing that the market is already foreseeing beyond the FED: bears lead the way weekly and monthly basis, but bulls are up to 50% in a three month view, with clear divergences on price targets, as some investors are betting on a break below parity and others on a recovery beyond 1.1000, leaving the pair not far from the current level. Seems the longer outlook will become clearer only after the FED. Banks lean the balance towards the upside in the longer outlook.

The dollar is seen firmer against the Pound, with bears being a majority short and mid-term, although the percentage of bears decreases in term, with 62% seeing the pair falling this week, but only 47% beating on a downward move in a three-month view. The pair however, is hardly seen breaking below the 1.2000 level. Commodity-related are also seen down against their American counterpart.

The USD/JPY pair is surprisingly running one step in from of investors, ever since the year started. Sentiment towards the pair is bearish, but not because the market is waiting for a sharp retracement, but because of the new run higher which left the 1 week as bearish, but with an average price of 114.31. Bears increase to 71% in a one  month view, although the pair is seen correcting down to 110.00 the  most, rather than losing its bullish strength.