EUR/USD muted post Hawkish Fed Verdict but still a falling knife

EUR/USD OUTLOOK:

  • The euro lacks conviction against the US dollar on Thursday, moving between small gains and losses
  • The Fed’s hawkish monetary policy outlook could reinforce EUR/USD’s bearish bias in the near term
  • This article examines the key EUR/USD technical levels to watch in the coming days

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EUR/USD lacks conviction on Thursday, swinging between small gains and losses, likely constrained by rising US Treasury yields a day after the Federal Reserve approved another big hike and pledged further tightening vigorously monetary policy to curb inflation. At the time of this writing, the exchange rate has retreated sharply from the overnight session high of 0.9907 and is largely stable on the day around 0.9843, sitting near the one of its lowest levels in more than two decades.

Although the Euro appears oversold against the US Dollar, its outlook remains bearish, with few positive catalysts on the horizon. From a fundamental perspective, the dynamics of the US bond market will continue to be a headwind for low carry currencies. For context, earlier in the day, US Treasury rates hit new multi-year highs, with the 2-year and 10-year notes hitting 4.15% and 3.70%, respectively.

The Fed’s hawkish roadmap, which points to a terminal rate of 4.6% in 2023 and implies about 150 basis points of additional tightening, as well as its commitment to maintain a restrictive stance for an extended period, should keep rates Americans biased to the upside, adding momentum to the dollar in the FX space.

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While the European Central Bank is also raising borrowing costs to combat strong inflationary pressures in the region, its response has been less aggressive in comparative terms due to growing downside risks for the bloc stemming from the energy crisis following the the militarization of natural gas supply by Russia. The divergence in monetary policies therefore also worked against the euro.

Focusing on macro variables, the economic outlook is rapidly deteriorating in the United States and Europe, but the North American country is in a much better position to weather the strong winds. Recent data appears to confirm this assessment, with Eurozone consumer confidence in September dipping to -28.8, its lowest level on record in extreme pessimism. In this environment, EUR/USD will struggle to mount a sustained rally.

Another key threat to high beta currencies these days is market sentiment. If the likelihood of a global recession increases significantly in the near term, risky assets such as stocks and cryptocurrencies are likely to extend their 2022 slump, prompting traders to bolster their defensive positions. In times of heightened turbulence and flight to safety, the US dollar tends to outperform most of its peers. All of this suggests that the euro is in the wrong place.




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Shorts

OI

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Weekly 14% -37% -5%

EUR/USD TECHNICAL ANALYSIS

After the recent dip, EUR/USD fell to multi-decade lows, a sign that the bears are firmly in the driver’s seat. If the pair fails to rally and reclaim the 0.9900 area decisively in the coming days, the selling momentum could pick up as the bulls bail out, paving the way for a decline towards the 0.9900 area. 0.9670. On further weakness, focus shifts to channel support near 0.9559. On the other hand, if we see a sustained move above 0.9900, the next resistance appears just a little above the parity mark, as seen in the chart below.

EUR/USD TECHNICAL CHART

EUR/USD chart prepared using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX

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