Euro-Dollar Profit-taking Looms, Warns UniCredit
- Written by: Gary Howes
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"EUR-USD might show a 'sell the fact' reaction to the FOMC meeting’s outcome." - UniCredit.
The euro printed a new four-year high against the dollar in the approach to the Federal Reserve's expected midweek interest rate cut, however a near-term setback cannot be discounted say analysts we follow.
"Following EUR-USD’s sharp rally yesterday to a new year-to-date high of 1.1878, a 'sell the fact' reaction on the Fed’s announcement cannot be ruled out," says Roberto Mialich, FX Strategist at UniCredit in Milan.
Markets anticipate September will see the commencement of a generous easing cycle as the Fed seeks to underpin a deteriorating labour market, even if inflation is still some way above the mandated target.
In anticipation of the easing cycle, the euro to dollar exchange rate has added to its uptrend with a 0.87% gain for the week already. It attained 1.1878 on Tuesday, which is the highest level since September 2025.
UniCredit explains that the currency impact of the Fed's decision depends on any indications the Fed might offer regarding further policy moves beyond the expected 25bp rate cut.
With a further 100bp worth of cuts priced beyond today's move, the market is already well prepared for further easing, which opens the door to some disappointment if the Fed is unable to generously validate this greedy pricing.
This reflects how markets often move in anticipation of news, not in response to the news itself.
Above: The RSI (lower panel) on the weekly chart is approaching overbought, opening the door to a setback in the uptrend.
By the time the Fed's cut is officially announced, the negative outcomes for the USD will have been fully priced in, and there's no new catalyst to push prices higher, so traders take profits, leading to a sell-off.
"However, such a reaction might be limited, probably slightly below 1.18 at worst," says Mialich.
He anticipates weakness to "rapidly turn into a new buying-on-dips opportunity. After all, charts suggest that there is no major obstacle preventing EUR-USD from moving towards 1.20."
1.20 appears to be a target many institutional analysts and professional traders are targeting. Brent Donnelly at Spectra Markets gives a particularly useful insight into the matter here.
"Notably, EUR-USD at 1.20, on which many option barriers have been presumably fixed, would represent a key level, especially after many ECB officials have indicated that EUR-USD rising to 1.20 could be acceptable, while a rise beyond that threshold might be more problematic," says Mialich.
