EUR/USD Eyes Sub-$0.9850 on Policy and Economic Divergence
It was a quiet start to the day for the EUR. There were no Eurozone economic indicators for the markets to consider going into the European session.
The lack of stats left market sentiment towards monetary policy and economic growth prospects to provide direction. With the Eurozone approaching the winter and the gas crisis showing no signs of ending, the scales remain tipped in favor of the dollar.
From the ECB, ECB member Luis de Guindos spoke earlier today but failed to move the dial. No other ECB members will be speaking ahead of the Fed.
The lack of economic data and ECB chatter leaves the markets to focus on the Fed policy decision and projections.
EUR/USD Price Action
At the time of writing, the EUR was down 0.43% to $0.99266. A mixed morning saw the EUR/USD rise to an early high of $0.99751 before falling to a low of $0.98845.
The EUR/USD fell through the First Major Support Level (S1) at $0.9933 and the Second Major Support Level (S2) at $0.9896 before returning to $0.99 levels.
The EUR/USD needs to move through S1 and the $0.9992 pivot to target the First Major Resistance Level (R1) at $1.0028 and the Tuesday high of $1.00506.
With no economic indicators or ECB member chatter to influence, sentiment and reaction to today’s FOMC policy decision and projections will be the key drivers. In the case of a dovish 75-basis point rate hike, the EUR would likely test the Second Major Resistance Level (R2) at $1.0087 and resistance at $1.0100. The Third Major Resistance Level (R3) sits at $1.0183.
Failure to move through S1 and the pivot would see the EUR/USD retest the Second Major Support Level (S2) at $0.9896 and support at $0.9850.
However, barring a market flight to safety, the EUR/USD pair should avoid the Third Major Support Level (S3) at $0.9800.
Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The EUR/USD sits below the 50-day EMA, currently at $0.99945. The 50-day EMA fell back from the 100-day EMA, with the 100-day EMA easing back from the 200-day EMA, delivering bearish signals.
A EUR/USD breakout from the 50-day EMA ($0.99945) would give the bulls a run at the 100-day EMA ($1.00084) and R1 ($1.0028). The 200-day EMA sits at $1.00556. However, failure to move through the 50-day EMA would leave the Major Support Levels in play.
The US Session
It is a big day ahead on the US economic calendar. Early in the US session, existing home sales are due, though the numbers are unlikely to impact the EUR/USD. The market focus will be on the FOMC monetary policy decision and projections.
This morning, the FedWatch Tool had the probability of a 75-basis point rate hike at 84% versus 16% for a percentage point move. It will come down to today’s decision and the projections. Any talk of a percentage point hike in November would likely drive the dollar and weigh on riskier assets.
This morning, the probability of a percentage point hike in November was just 11.0%, down from 14.5% a week ago. Beyond interest rates, there will also be plenty of market interest in the economic projections as recession fears resurface.