EUR/USD Daily Forecast – Euro Surges on Dovish Fed Rhetoric

Fed Signals a Rate Cut in 2020

The markets didn’t get what they want, at least 50 basis points in cuts this year, but the Fed meeting was still quite dovish. The dollar fell under pressure following the statement but a bulk of the recent decline has happened in early trading today.

There were a few items that made the central bank sound much more dovish than before. First, I think it is important to note that one member wanted to cut at yesterday’s meeting. It was James Bullard who voted against the action of leaving rates unchanged, preferring to cut 25 basis points instead.

Second, the statement reiterated what Powell said in an earlier speech. This was that the bank “will act as appropriate to sustain the expansion”. Essentially, they are saying they will cut when needed to ensure the economy remains on track. This can easily be interpreted that they will move sooner if needed, and they might cut more than once if required.

Inflation and Labor Markets

The Fed also expressed some doubts about meeting its 2 percent symmetric inflation objective. This one is quite important. If policymakers are unable to meet their objective, they will be forced to ease. Recall Powell’s speech where he emphasized how a small down tick in inflation can have significant repercussions if it were to occur on a sustained basis. There will be a greater focus on inflation-related data moving forward and the dollar’s sensitivity should be heightened as a result of this message.

On the same subject, they noted that market-based measures of inflation had declined. This was after a period of time that it was already considered to be low.

Lastly, they weren’t as confident about the labor markets. There was a small change if rhetoric from describing the job market as strong to labeling it moderate. The Fed puts a lot of emphasis on this metric. Although the unemployment rate is below long-run expectations, jobs growth and average hourly earnings have softened a great deal recently.

Technical Analysis

Aside from levels and patterns on a chart, I think the most important thing to consider is the upside momentum in EUR/USD. Also, the dollar is gaining broadly, against all of its counterparts. There have been some notable breakouts. The one that seems to be the most impressive is the rally in gold prices to five-year highs. The yellow metal picked up momentum after it crossed a major technical hurdle at $1350.

On a daily chart, I think the next place EUR/USD will want to go is 1.1350. This is where the pair topped out earlier this month. It’s also where the 200-day moving average is.

One thing that stands out to me is that much of this rally happened in Asian trading. Perhaps European and US traders will struggle to chase this rally higher, which could result in a slowing of momentum later in the day.

The 4-hour chart shows some levels I think EUR/USD will respect as support, in the event it dips. The first level of interest falls at 1.1280. This level acted as major resistance ahead of last weeks US retail sales support. I see further support at 1.1260. This level had tried to cap the rally yesterday. To the upside, I see a hurdle at 1.1305 or essentially the psychological 1.1300 handle.

Bottom Line

• I expect that any dip in EUR/USD will likely be bought. I think that playing the short side here is quite risky.
• The 200-day moving average and prior June high looks like a magnet for EUR/USD.
• 1.1280 and 1.1260 are the two levels I have my eyes on for dips in the session ahead.