- EUR/USD moves between gains and losses at the start of the week amid conflicting price action drivers
- The euro cannot benefit much from a weak US dollar as news that Gazprom will cut gas exports to the eurozone weighs on sentiment.
- As for the next catalysts to watch, the FOMC decision will steal the spotlight this week
Most Read: USD Technical Analysis – DXY Retreats to Test 1st Support
The EUR/USD was mixed on Monday at midday, swinging between small gains and losses near 1.0210 amid conflicting forces pushing prices in opposite directions. On the one hand, the weakness of the US dollar supported the riskier currencies somewhat, but on the other hand, the news that Gazprom would reduce gas exports flowing to the eurozone through the Nord Stream pipeline to 20% of capacity led to a decline in the euro. While the European energy crisis is likely to dominate the headlines in the near term, there is another important catalyst to watch this week that could lead to volatility and set the tone for EUR/USD: the Federal Reserve’s monetary policy decision on Wednesday.
To provide some context, the Fed acknowledged that it had waited too long to begin removing policy accommodation in the face of hyperinflation. To make up for lost time, the institution has adopted a very hawkish bias, aggressively raising rates in recent months. Judging from recent communications, policy makers are willing to take some economic pain in the process to restore price stability, suggesting that the current slowdown in business activity will not stop them from moving forward with their tightened plans.
This begs the question: What should traders expect at this week’s Federal Reserve meeting – will the bank introduce another rate hike of 75 basis points, similar to the one in June, or will it surprise Wall Street with a full percentage point adjustment after the rally. – Expected CPI readings?
After inflation hit a new multi-decade high last month at 9.1% y/y, the market briefly braced for the possibility of a 100 basis point increase at the July meeting, but several officials, including Christopher Waller and James Bullard, two well-known hawks, They poured cold water on the idea before the blackout period began. If policymakers were interested in expansion, they would have used the rhetorical posts of key markets to elicit a more loaded response. Obviously that did not happen.
The most likely outcome then is a 75 basis point hike, which would put the fed funds rate in the 2.25%-2.50% range, around what most participants consider a neutral rate. This scenario is already largely discounted, so traders should focus on driving the statement forward and President Powell’s press conference.
With inflation expectations heading lower and the CPI expected to fall in the coming months amid falling commodity prices, there is no reason for the central bank to become progressively more hawkish, especially since the economy may be on the verge of recession. This means that the “peak Fed tightening” has likely passed, driving a strong bullish catalyst away from the US Dollar. And while the US currency may continue to strengthen from time to time due to the risk-off sentiment stemming from recession anxiety and the energy crisis in Europe, it may not be able to repeat the vertical rally seen this year.
All in all, the FOMC is gearing up for another rate hike this week. This move has already been discounted, so it is unlikely to be a significant source of strength for the US dollar. Against this backdrop, it wouldn’t be surprising to see a “buy the rumor, sell the news” type episode later this week, with the US currency depreciating against the majors. This could mean that the EUR/USD pair could rise in the near term, provided that the energy crisis in the Eurozone does not worsen.
Technical analysis of the EUR/USD pair
The EUR/USD pair briefly fell below parity earlier this month, but failed to close below that key psychological level, with the bulls re-emerging and launching a recovery away from channel support as seen in the daily chart below. Since those days, the pair has risen more than 200 pips, but the recovery has stalled near 1.0270/1.0300, which is a major resistance to watch. If the buyers can decisively open this area in the upcoming sessions, the bullish momentum may strengthen, paving the way for a move towards 1.0350, followed by 1.0450, as the 50-day SMA converges with the upper trendline of the descending channel.
On the flip side, if prices are rejected from current levels, initial support appears at 1.0130, but if this floor is eventually breached, traders should prepare for the possibility of retesting 2022 lows slightly below parity.
EUR/USD Technical Chart
EUR/USD chart created using TradingView