EUR/USD Regains Bullish Traction But Faces Heavy Headwind Above, Fed’s Decision Awaited

Key Takeaways:

• The EUR/USD cross regained bullish traction on Wednesday during the Asian session, but further uptick seems elusive
• Better-than-expected eurozone inflation data reaffirm bets for an ECB rate hike pause, which weighs on the euro
• Markets entirely focused on the FOMC September decision, the Fed is expected to leave its Fed funds rate unchanged

The EUR/USD pair attracted some buying on Wednesday during the early Tokyo session. They rose to a fresh daily high after witnessing fresh demand from the vicinity of the 1.06791 level. As such, the shared currency has managed to reverse part of the previous day’s losses and is trading around 50 pips above the six-month low/1.06321 level touched last Thursday as of press time. The FOMC started its two-day Monetary Policy meeting yesterday and is scheduled to announce its decision later today, of which it is widely expected that the Fed will pause again for the second time this year its rate hiking cycle by leaving its Fed Funds rate unchanged at 5.25% this time, which in turn would weigh on the buck and help extend the current bullish correction.

Cementing the odds for a September pause was the U.S. Bureau of Labor Statistics (BLS), released early this month, which indicated a gradual easing of labor market conditions. The bets were lifted after another BLS report showed that the annual core consumer price inflation rate in the United States, excluding volatile items such as food and energy, fell to its lowest level in two years.  

Despite that, market investors are still pricing that the Federal Reserve (Fed) will lift interest rates by 25 basis points (bps) before the end of this year, which in turn remains supportive of the ongoing rise in U.S. Treasury Bond yields, which extends some support to the buck and could help limit further EUR/USD gains. Recent data showed the U.S. economy continued to display remarkable resilience, cementing the case for a final 25 bps Fed rate hike before the year ends.  

On the other hand, the European Central Bank (ECB) announced last week, on Thursday, a 10th rate hike of 25 bps, taking its primary refinancing operations rate to a 22-year high of 4.5% and its deposit facility rate to a new record at 4%. The ECB, however, signalled that it was likely done with its tightening policy, as inflation has started to decline but is still expected to remain too high for too long.  

Reaffirming the case that further ECB rate hikes are off the table was the Eurostat report released yesterday, which showed the annual inflation rate in the Euro Area was revised lower to 5.2% in August 2023 from an initial estimate of 5.3%, marking the lowest reading since January 2022. The CPI increased 0.5% every month, slightly below 0.6% in the first estimate. Additionally, Excluding food and energy, the annual inflation rate eased to 5.3% in August from 5.5% in July. This, in turn, weighs on the euro and suggests the path of least resistance for the EUR/USD cross is to the upside.

As we advance, market participants look forward to the euro docket featuring the release of a slew of speeches by key ECB figures. The main focus, however, remains on the release of the Fed Interest Rate Decision later today during the mid-North American session. Investors will keenly follow the FOMC statement accompanying the Fed Interest Rate Decision announcement and the question-and-answer segment with the Fed Chair, Powell, during the FOMC press conference to see how hawkish/dovish the language is around inflation and future monetary policies. This, in turn, would influence the USD price dynamics and provide directional impetus for the EUR/USD cross.

Technical Outlook: One-Day EUR/USD Price Chart

From a technical perspective, the EUR/USD cross remains under heavy bearish pressure as the technical oscillators on the chart (RSI (14) and MACD) are in dip-negative territory, suggesting the continuation of the bearish price action. Additionally, the acceptance of price below the technically strong 200-day (yellow) Exponential Moving Average (EMA) at the 1.08143 level supported the case for further downside moves, thus suggesting the current bullish correction runs the chance of fizzling out sooner or later. That further upticks could still be seen as Sell opportunities. Additionally, a gravestone Doji (19 September, one-day candlestick) acts as a bearish signal that the price would reverse to the downside, highlighting the immense overhead pressure above the current price action.

If sellers jump back in and catalyze a bearish reversal, initial support appears at the 1.06311 level. If sellers manage to breach this floor, downside pressure could accelerate, paving the way for a drop toward the lower limit of the descending channel pattern extending from the late-July 2023 swing low. A subsequent break (bearish price breakout) below this support level would reaffirm the bearish thesis and pave the way for dip losses around the EUR/USD cross.