EUR/USD Daily Forecast: Euro Falls Back As Powell Readjust Expectations

July Rate Cut Expectations Drop Following Fed Speeches

Fed member speeches confirmed that the Fed is indeed ready to cut rates, just not at the pace that the markets believe it will. Powell held his stance that the Fed will act to sustain the recovery, similar to his rhetoric at the Fed meeting last week.

While there was a lot of focus on Powell’s speech, it was Fed member Bullard that surprised the markets. Bullard is a known dove and had voted to cut rates last week. Yesterday he said that a 50 basis point cut would be overdoing it. He also referenced a near-term cut as an ‘insurance’ cut which hardly signals the start of a broader easing cycle. It is unlikely that any other members will consider a 50 basis point cut if Bullard is not behind it, as he is considered the most dovish voting member of the Fed.

The futures markets have adjusted expectations somewhat. Yesterday, the CME FedWatch tool indicated a 42% probability of a 50 basis point cut in July. Today, this figure had dropped to 26%. There is still some data scheduled for release in early July that might sway the minds of policymakers. However, after yesterday’s speeches, I think it is very unlikely that the central bank will make a move so aggressive.

Despite a lack of a clear signal that the Fed will move in July, the futures market continue to indicate a 0% chance that rates will remain unchanged in July. In other words, one rate cut remains fully priced in.

Technical Analysis

The decline in EUR/USD was met with sellers at a support confluence outlined in yesterday’s forecast. Specifically, the area comes in at 1.1350 and reflects the early June high, the 200-week moving average, and the 200-day moving average.

Yesterdays Fed speeches have really taken the momentum out of the rally in EUR/USD. On a daily chart, the pair printed a bearish engulging candle, which suggests some potential for a broader correction. However, on a 4-hour chart, early buying in European trading shows the pair is on track to post a bullish engulfing candle.

I see resistance on an hourly chart at 1.1385. Above that, I think 1.1395/1.1400 will be a hurdle. As the fundamental backdrop has shifted somewhat, I expect that rallies will be met by sellers, or rather, will induce profit taking.

Bottom Line

• In the absence of a news catalyst, EUR/USD may continue to trickle lower.
• Fed member speeches signal a 50 basis point cut next month is unlikely.
• Near-term rallies may be hindered by profit-taking ahead of the 1.1400 handle.