EURUSD Rate Susceptible to Larger Correction on Dovish Fed Rhetoric


EURUSD retraces the decline following the Federal Reserve interest rate decision, with the exchange rate extending the advance from the monthly-low (1.1027) amid the growing threat of a US-China trade war.

The ongoing shift in US trade policy may continue to influence monetary policy as it puts pressure on the Federal Open Market Committee (FOMC) to insulate the economy, and the central bank may come under increased scrutiny to reverse the four rate hikes from 2018 especially as President Donald Trump tweets that the Fed “must cut rates bigger and faster, and stop their ridiculous quantitative tightening now.

It seems as though the Federal Reserve will continue to alter the forward guidance ahead of the next interest rate decision on September 18 as St. Louis Fed President James Bullard, a 2019-voting member on the FOMC, insists that “additional policy action may be desirable” amid the uncertainty surrounding the economic outlook.

Image of Fed Fund futures

In turn, Fed Fund futures highlights a 100% probability for at least a 25bp reduction, and speculation for lower US interest rates may keep EURUSD afloat as the European Central Bank (ECB) appears to be in no rush to implement a negative interest rate policy (NIRP) for the Main Refinance Rate, its flagship benchmark for borrowing costs.

With that said, expectations for an imminent FOMC rate cut may keep EURUSD afloat, and current market conditions may fuel a larger correction in the exchange rate as Fed officials show a greater willingness to implement lower interest rates.

EUR/USD Rate Daily Chart

Image of eurusd daily chart

The reaction to the FOMC meeting undermines the broader outlook for EURUSD as the exchange rate clears the May-low (1.1107), with the 1.1100 (78.6% expansion) handle no longer offering support.

The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator fails to retain the bullish formation from earlier this year.

However, the monthly opening range raises the risk for a larger correction in EURUSD amid the failed attempt to close below the 1.1040 (61.8% expansion) area, with a close above the 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) region opening up the Fibonacci overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.



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