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The EUR/USD exchange rate is at 1.1807 on Thursday amidst a broad rise in the U.S. Dollar. Analyst and technical forecaster Richard Perry of Hantec Market says downside pressure on 1.1695/1.1750 is building.
Reaction to the dovish Federal Reserve announcement would suggest that the short USD trade (which has driven EUR/USD higher) is a little tired.
The resulting dollar rebound has dragged EUR/USD lower in a move that continues today.
The bullish medium term outlook on EUR/USD is coming under growing pressure now.
Breaking the four month uptrend (which is at 1.1825 today) the key medium term support band 1.1695/1.1750 is now coming under threat.
We have previously noted that a close below 1.1750 would be a deterioration, but only below 1.1695 would be the confirmation of the strong euro position.
Technical momentum indicators suggest that this is a move that is close to turning what is, for now, a trading range (between 1.1695/1.2010) into a top pattern.
How the bulls respond to 1.1750 could be key to this.
The hourly chart shows a failure of 1.1810/1.1825 in the wake of the FOMC decision which is now initial resistance to overcome.
Continued failure under there would increase downside pressure on 1.1695/1.1750.
A close under 1.1695 opens the 1.1500 area.
In the wake of Fed chair Powell’s speech at Jackson Hole, markets have had a few weeks to position for a new dovish paradigm of FOMC monetary policy.
As part of its new average inflation targeting policy, yesterday the Fed statement says that it will “aim to achieve inflation moderately above 2% for some time”.
It was a high bar that the Fed needed to overcome for renewed dollar weakening. It appears that they have missed it.
In not defining the “time” (either with a level or length of time) this led to a couple of dovish FOMC members dissenting the move (Kashkari and Kaplan).
Although the FOMC dot plots suggest rates are on hold at least until 2023, the market took this as not hitting dovish expectations.
The dollar has notably strengthened across the forex major pairs as a result, whilst Wall Street has slipped back.
This Fed meeting certainly does not change the narrative of looser for longer, but for now, there is a kick back and potential near term short covering dollar rally.
It will be interesting to see how long this lasts before the medium term dollar correction resumes. Resistance at 93.50/94.00 on Dollar Index is key.
The Bank of Japan as expected has left rates unchanged at -0.1% and the 10 year JGB target yield of 0%. The yen has held up well on the back of this amidst a strengthening dollar. Traders will also be looking out for how dovish the Bank of England leans today.
After the BoJ overnight, there is one more major central bank on the economic calendar, with the Bank of England announcing monetary policy, along with a smattering of US data too. First up though is the final reading of Eurozone inflation for August.
After the surprise move to headline deflation, Eurozone headline HICP is expected to remain at -0.2% (-0.2% flash, +0.4% final July), whilst Eurozone core HICP is expected to remain at +0.4% (+0.4% flash, +1.2% final July).
The Bank of England is announcing monetary policy at 1200BST which is expected to once more be kept steady, with the interest rate of +0.1% and asset purchase stock at £745bn.
The vote on rates is expected to be unanimous. The US data is all released at 1330BST with the Weekly Jobless Claims expected to once more reduce, to 850,000 last week (from 884,000 previously).
The Philly Fed Business Index for September is expected to drop slightly to +15.0 (from +17.2 in August). US Building Permits for August are expected to improve by +2.5% to 1.52m (from 1.48m in July), whilst US Housing Starts are expected to decline by -1.2% to 1.48m (from 1.50m in July).