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EUR/USD Rally Passes Key Test

Exchange rates

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- EUR/USD defends support at 200-day MA

- Crucially so far has not broken below the MA

- Durable goods orders mixed; Fed speak positive

The Euro-to-Dollar exchange rate - the most widely traded currency pair in the world - looks set to hold above an important chart level possibly heralding a more bullish outlook in the future.

The pair recently broke above the 200-day moving average (MA), an important chart level, and this, along with other previous technical developments, such as the formation of a ‘key reversal’ day at the May lows, is a sign the pair could be starting a strong uptrend which could endure.

EUR to USD daily

The pair has closed above the 200-day MA at 1.1348 for the last three days and this indicates it has probably broken clearly above it.

Large MAs are like trendlines, they are critical chart hurdles prices need to break through in order to reverse the trend.

Although the exchange rate lost substantial ground on Wednesday and was at risk of falling back below the 200-day, it ultimately closed above this 'line in the sand', lending confidence to the outlook for the exchange rate.

EUR/USD holds above key level

The U.S. Dollar gained against the Euro on Wednesday after the most dovish member of the Federal Reserve (Fed), James Bullard, said he thought only one interest rate cut would be enough to provide ‘insurance’ against a downturn in the economy. Markets had assumed a deeper cut in interest rates would be necessary.

A key econometric for the U.S. economy, durable goods orders, which measure sales of large products, showed mixed results when released on Wednesday, June 26, but overall they did not pressure the U.S. unit any lower.

Durables provide an insight into economic growth and are seen as a measure of business investment since they involve the purchase of very expensive capital intensive goods.

The headline figure showed a much lower-than-expected -1.3% fall in May whilst core durables actually rose by a greater-than-expected 0.4%.

The difference was explained as due to a fall in orders of civilian aircraft compared to the month before, which are included in the broad gauge but not the core figure.

"Durable goods orders fell again, and the previous month’s figures were revised down too, which at least helps to reinforce the dovish case, after Bullard’s (a member of the U.S. Federal Reserve) more cautious message yesterday on rate cuts," says Chris Beauchamp, Chief Market Analyst at IG.

The Dollar has been under pressure since the Federal Reserve indicated it was leaning towards cutting interest rates in order to safe-guard the U.S. economic expansion.

In response to expectations for falling economic growth rates, compounded by trade war fears, the Fed last week sent currency markets a dovish message by signalling the possibility of a rate cut, which the markets believe could be at the next meeting in July.

The update to the FOMC’s interest rate projections (the ‘dot plot’) showed that 8 of the 17 Committee members now expect rates to move lower in 2019, with a majority for a rate cut by 2020 – although they also predict a hike in 2021.

The shift has conincided with a turn higher in the EUR/USD exchange rate from below 1.12 to a peak above 1.14.

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