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Jignesh Davda

Powell to Set the Tone for EUR/USD

Earlier this week, minutes from the latest Fed meeting revealed that members were divided on several issues. The main ones being inflation and interest rates.

Some members had wanted a half-point cut, some did not want to cut at all. This might explain why Powell was a bit all over the map at the press conference that followed the meeting. He confused the markets by first saying that it was an insurance cut, but then suggesting that they could ease more.

Perhaps the markets will get some clarification later today as Powell is scheduled to speak. I say perhaps because there is a good chance the Fed will want to remain data dependent and reveal as little information as necessary.

I think it is important to keep in mind that there have been further developments in the trade war since the last Fed meeting. This might lead to a more dovish tilt. At the same time, economic data has been coming in a bit better than expected.

The futures markets have been steadily backing away from the view that the policymakers will ease aggressively. The CME Fedwatch tool at point showed some potential for a half basis point cut in September but that is no longer the case. A rate cut is still expected, however, and odds of a quarter-point cut last stood at 91%.


Technical Analysis

EUR/USD briefly dipped below the lower bound of a range during the Asian session. This has likely triggered some stops and volatility has died down in a major way since.

Yesterday, an early day recovery rally was promptly reversed and the momentum has been to the downside since.

EURUSD Hourly Chart

I think the bigger move in the pair might happen later in the day, based on what Powell says. We have already broken below support at 1.1074. There is further support at 1.1066 which had held prior spikes. If we get below, I would expect a move towards the yearly low of 1.1027.

If we get back above 1.1075 is see some potential for a test of the 100-hour moving average, currently around 1.1088.

Bottom Line

  • Volatility is slow in early day trading but expected to pick up later as Powell speaks.
  • Some key support is being tested, if it breaks, we may see EUR/USD making an attempt at this year’s low.
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