EUR/USD Daily Forecast – Euro Attacks 1.12 Handle

The dollar continues to outperform in the early week, sending EUR/USD to lows not seen since mid-June. The driver for the surge in the greenback is a readjustment of rate cut expectations. With several Fed members scheduled to speak over the next few days, EUR/USD might see some unusual volatility.

Fed Member Speeches and Powell’s Testimony

The markets have already readjusted expectations for a near-term rate cut by a significant margin. According to the CME FedWatch Tool, there is essentially no expectation for a 50 basis point cut in July, however, the markets remain confident that the Fed will deliver a 25 basis point cut at their meeting later this month. They are also pricing in at least one more cut by the end of the year.

The fate of the dollar is now in the hands of the Fed as communication over the next few days will clarify the Bank’s position relative to the market. Here are some of the key events that stand to move EUR/USD.

Tuesday

• Fed Chair Powell speaks at an event held by the Federal Reserve Bank of Boston.
• Bullard, a known dove, will deliver opening remarks at a meeting in St.Louis.
• Fed member Quarles scheduled to speak about stress testing in Boston.

Wednesday & Thursday

• Fed Chair Powell will testify before the Senate Banking Committee.

All three are voting members and their communication stands to move the markets. Quarles will be talking about stress testing, there is a chance he won’t discuss monetary policy which makes me think this will be the least influential speech.

Bullard is a known dove. Recall he was the member that wanted to cut rates at the June meeting. His remarks stand to move EUR/USD if they differ from his communication a few weeks ago.

Powell, being the Fed Chair, stands to drive the most volatility to the markets. His testimony can trigger unpredictable swings in the markets. In the past, there was a strong reaction the first day and not much of a reaction the second. But that does not necessarily predetermine how the markets will react this week. Also, his testimony can be several hours and the exchange rate can suddenly swing in either direction at any point during it. I think it is important to be cautious when trading during this time.

Technical Analysis

In yesterday’s forecast, I pointed out a significant level found at 1.1188. The level has acted as support and resistance in the past. Most recently, it held the exchange rate higher in June.

EUR/USD is seen approaching the level in early trading today. I expect that it might try and breach below it, at least momentarily, to trigger stops below the mid-June lows.

If the break is sustained, however, I would look to target support near 1.1135. Ahead of Fed communication, I don’t think it is likely that this will happen.

Bottom Line

• Fed member speeches and Powell’s testimony stand to drive EUR/USD in the next few days.
• Major support in focus at 1.1188.