EUR/USD Daily Forecast – Fed Triggers a Fall to 26-Month Lows

Takeaway From Wednesday’s Fed Decision

The Federal Reserve cut interest rates on Wednesday which was widely expected. However, the markets were looking for a bit more from the Fed, and as a result, equities tumbled alongside precious metals while the dollar rallied.

According to the CME Fedwatch tool, the markets were looking for 50 basis points worth of cuts. At one point, the probabilities favored that to happen at yesterday’s meeting. Ahead of the Fed decision, it was expected to happen with cuts at both the July and September meeting.

Fed Chair Powell’s words were conflicting. He pointed out that the Fed has had mid-cycle cuts before only to proceed to raise rates again. At the same time, he also said that there is no reason to believe it will be just one cut.

The net result was that there is not a strong reason to believe that the central bank is looking to cut again. Or rather, they are maintaining a data-dependent stance, giving them flexibility over future monetary policy decisions.

There are a lot of different paths that monetary policy can take from here. The main takeaway is that the markets had been looking for a stronger commitment to easing which was not the case.

Technical Analysis

After consolidating near important support for most of the week, the Fed meeting offered the needed catalyst for a downside break in EUR/USD.

The next logical area of interest to the downside falls at 1.1000 because of the psychological properties associated with the level. There are some other price points marked on the chart below that I think the markets might respect.

A horizontal level at 1.1027 is the first level that I have my eye on. I think the level can trigger a small bounce. But to be clear, the momentum is to the downside here and I expect rallies to be shallow.

In that context, I see resistance at 1.1064. The level triggered a small bounce yesterday and is near the lower line of a broken declining trend channel. This channel had contained price action since late June.

Usually, when a pair breaks lower from a descending pattern, it signals that bearish sentiment is increasing. In some cases, the same action can signal very oversold conditions that preceded a reversal. However, in this scenario, I favor the former.

Bottom Line

• The markets are scrambling a bit after the Fed came across more dovish than expected.
• EUR/USD seems poised to test a major psychological level at 1.1000.
• Near-term upside resistance is found at 1.1064.