- EUR/USD faces downward pressure as expectations dwindle regarding early interest rate cuts by the Federal Reserve.
- According to Bloomberg, the dot plot anticipated from the Fed’s meeting on Wednesday might indicate a transition from three to two cuts anticipated for this year.
- Such an adjustment would likely exacerbate the bearish sentiment surrounding EUR/USD.
Following last week’s release of warmer-than-expected US inflation data, EUR/USD has retreated and is currently trading within a new range in the 1.0800s. The data heightened the likelihood that the Federal Reserve (Fed) would need to maintain higher interest rates for an extended period.
The prospect of higher interest rates tends to attract increased foreign capital inflows, which has had a positive impact on the US Dollar (USD). Conversely, it has exerted downward pressure on EUR/USD, which represents the buying power of one Euro (EUR) in USD terms.
EUR/USD traders prepare for Fed meeting on Wednesday
Heightened volatility is anticipated for EUR/USD on Wednesday as the Federal Reserve concludes its March meeting, announces its policy decision, and releases its Summary of Economic Projections (SEP). While the possibility of a rate cut was on the table a few weeks ago, it is now highly unlikely.
Mark Cranfield, an analyst at Bloomberg MLIV, notes that the prevailing sentiment is acknowledging the Fed’s cautious approach. This sentiment is echoed by the CME FedWatch Tool, which indicates a decreasing probability of rate cuts. Currently, there is a 58% chance of one or more 0.25% cuts by June, and 76.5% by July, down from 80% for June earlier this month.
In the previous SEP, the Fed predicted at least three 0.25% interest rate cuts in 2024 in their “dot plot.” However, Bloomberg News suggests there is now a significant possibility that this projection will be reduced to only two cuts after the March meeting. Such a revision would be considered “quite aggressive,” according to Cranfield, and could lead to further weakness for EUR/USD.
Cranfield adds that maintaining the status quo with three dot-plot cuts would be considered a pleasant surprise. Such a scenario would be bearish for USD and bullish for EUR/USD.
July the new June
According to a Bloomberg report released on Monday, an analysis of over 900 headlines quoting Federal Reserve officials since the start of the year suggests that July may emerge as a more probable month for the Fed to initiate easing measures, rather than June. Should this scenario materialize, it would necessitate a further adjustment in market expectations, distancing them from June and potentially impacting the EUR/USD negatively, assuming all other factors remain constant.
On Monday, the Eurozone is not expected to see significant releases of major data. The Consumer Price Index figures for February represent a revision of previous estimates and are unlikely to deviate significantly from the preliminary results, which indicated a 2.6% headline inflation rate and a 3.1% core inflation rate.
Technical Analysis: EUR/USD hovers above abyss
EUR/USD encounters temporary support as it continues its retracement from the high of 1.0981 reached on March 8th.
The extent of this retracement raises doubts about the durability of the previously prevailing short-term uptrend.
The current price remains above the significant 1.0867 level, marking the previous crucial swing low. This level serves as a pivotal point for the ongoing trend, where a breach below it could tilt the probabilities in favor of a reversal from the recent uptrend.
If prices do decline below this level, it’s likely to extend further towards 1.0795, representing the low of the B leg within the prior ABC Measured Move pattern observed during February and early March.
Conversely, if the 1.0867 level holds, the short-term uptrend is likely to persist and potentially resume. Confirmation of this would entail achieving a higher high and a continuation of the uptrend, possibly by surpassing the previous peak at 1.0981.
Following such a breakthrough, formidable resistance is anticipated around the psychological barrier of 1.1000, where both bulls and bears are expected to fiercely contest.
However, a definitive breach above 1.1000 would pave the way for further advances towards the significant resistance level at 1.1139, representing the high from December 2023.
A “decisive” breakout is characterized by a strong bullish momentum, typically depicted by a long green candle piercing convincingly above the level and closing near its peak, or by observing three consecutive green bars firmly breaching the threshold.
