EUR/USD Hovering Above 5-Year Low Ahead of Fed Decisions

The Euro closed slightly higher on Tuesday, hovering just above a five-year low against the U.S. Dollar as traders positioned themselves ahead of Wednesday’s widely expected Federal Reserve rate hike.

The Fed has taken an increasingly aggressive approach to monetary policy as inflation rose at its fastest pace in 40 years, while the ECB has been more cautious. This has led to huge money flows into the U.S. Dollar.

On Tuesday, the EUR/USD settled at 1.0519, up 0.0011 or +0.10%. The Invesco CurrencyShares Euro Trust finished at $97.52, up $0.20 or +0.21%.

While investors are pretty clear about the Fed’s intentions, they have been struggling to understand the ECB’s next move.

ECB Vice President Luis de Guindos said in an interview published over the weekend by the central bank that its Governing Council hadn’t discussed “any predetermined path for rate rises”. He added that much will depend on macroeconomic data in June.

Money markets are pricing 90 basis points in interest rate hikes by the end of the year, with a first hike expected in July.

Concerns about inflation, growth and energy insecurity as a result of sanctions imposed on Russia after its invasion of Ukraine have sent the Euro 14% lower against the dollar in three months.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 1.0472 will signal a resumption of the downtrend. A move through 1.0936 will change the main trend to up.

The minor trend is also down. A trade through 1.0592 will change the minor trend to up. This will also shift momentum to the upside.

The minor range is 1.0936 to 1.0472. If the minor trend changes to up then its retracement zone at 1.0704 to 1.0759 will become the next upside target.

Short-Term Outlook

The direction of the EUR/USD early Wednesday is likely to be determined by trader reaction to a minor pivot at 1.0532.

Bearish Scenario

A sustained move under 1.0532 will indicate the presence of sellers. If this move creates enough downside momentum then look for a break into 1.0472. This is a potential trigger point for an acceleration into the January 3, 2017 main bottom at 1.0339.

Bullish Scenario

A sustained move over 1.0532 will signal the presence of buyers. If this move generates enough upside momentum then look for a surge into the minor top at 1.0592. This is a potential trigger point for an acceleration into the minor retracement zone at 1.0704 to 1.0759.