EUR/USD Attempts Recovery Ahead of Powell’s Testimony

The Dollar Retreats Prior to Big Risk Event

The greenback is under pressure in the early day, likely from some profit taking ahead of Fed Chair Powell’s Testimony later today.

Investors will be looking for clues on how the central bank proceeds in easing monetary policy. In the last two weeks or so, the markets have been paring back bets on rate cut expectations as it has become evident that the Fed is not in a rush to ease policy. This became apparent after some Fed communication and a strong US job report last week.

The Federal Reserve still has not given a concrete signal that they will cut rates at their meeting later this month. Considering that the markets are fully pricing in 25 basis point cut, perhaps a signal is not necessary. In this context, if the Fed does not intend to ease policy this month, today would be the appropriate time for Powell to level set the market. Although this does not seem to be a likely scenario.

In addition to near-term expectations, the markets will also want some confirmation that the central bank will ease at least one more time this year. At least, that is what the futures markets have been pricing in.

A lot depends on what Powell says today. Despite the recent adjustments in the markets over easing expectations, there is still a strong expectation that the central bank will start an easing cycle this month.

Technical Analysis

Although the dollar is under pressure in the early day, I don’t think it’s something that carries a lot of weight. More likely than none, this is probably profit-taking after a sharp rally in the greenback. Price action following Powell will tend to be much more important.

Having said that, I see some near-term resistance within sight for EUR/USD. Namely, I’ve marked off resistance at 1.1237 on the above chart. The pair turned lower slightly ahead of the level earlier in the week. The 50-day moving average is also within close proximity of the horizontal level.

I think it will take a sustained move above 1.1265 to shift the bearish sentiment in EUR/USD. In addition to a horizontal level there, the upper bound of a declining trend channel comes into play.

To the downside, there is a support level at 1.1188 that is quite relevant. If the pair turns lower to test it, it might try and breach below it to trigger stops from long positions playing against the mid-June low.

Bottom Line

• The dollar is recovering but price action after Powell’s testimony will be much more important.
• It will take a move above 1.1265 to signal that a bottom is in play for EUR/USD, at least a near-term one.