EUR/USD Soft Ahead of Key Technical Levels, After Wednesday’s Fed Minutes


Fed May Minutes

The US Federal Reserve had delivered its largest rate hike in more than twenty years early in the month and the accounts of that policy meeting were released yesterday, showing a hawkish stance, without adding anything new though in the discourse, [1]

Participants acknowledged that in inflation is very high and risk were "skewed to the upside" and that more 50 basis points rate increases would "likely be appropriate at the next couple of meetings", confirming what Chair Powell had said in the relevant press conference.

Furthermore, officials agreed that the bank should "expeditiously" move towards a neutral posture, adding that a "restrictive" policy stance may become appropriate, if the economic outlook warrant it.

Hawkish, Albeit Conservative Fed

The Fed has embarked upon on an aggressive and front-loaded tightening path to bring down inflation, which has shown some moderation recently. Yesterday's minutes reaffirmed that, but the bank has also shown conservatism around its upcoming moves.

After the last policy meeting, Mr Powell had ruled out larger 75 basis points rate adjustments, as "not something the Committee is actively considering" [2], although he had tried to reassert the bank's hawkishness and commitment to fight inflation, with his appearance last week on the Wall Street Journal Future of Everything Festival.

Chair Powell had commented that officials will have to consider "moving more aggressively" if they don't see "clear and convincing evidence" that inflation is coming down. [3]

Trade the News: View our Economic Calendar

Furthermore, those restrictive policies, along with other factors, could send the economy into a recession and hurt the labor market. Mr Powell has not inspired confidence in the bank's ability to avoid that, having talked of a "soft or softish landing" and had said that a soft landing "may actually depend on factors that we don't control" in Marketplace interview earlier in the month. [4]

Increasingly Hawkish ECB

The European Central Bank (ECB) is far behind its major counterparts in normalizing its ultra-loose monetary policy, but these days may be soon coming to an end, as it has been moving towards a more hawkish stance.

The central bank had brought forward the conclusion of its asset purchases program (APP) and pointed to interest rates lift-off sometime after that. We had recently seen a series of hawkish commentary from ECB officials, with some of them calling for rate hikes as early as July.

This week, President Lagarde gave her seal of approval to these more aggressive policy views, expressing her expectation that purchases under APP would "end very early in the third quarter", which "would allow us a rate lift-off at our meeting in July". She also added that the bank is likely in a position to "exit negative interest rates by the end of the third quarter". [5]

EUR/USD Analysis

The pair started the current week with a bang, after having already halted its sex-week losing streak, boosted by Ms Lagarde's hawkish policy guidance. This allowed it to move to new monthly highs and close Monday above the EMA200, as we had mentioned in our last analysis.

This solid performance has brought in its crosshairs, the key 1.1078-83 area, which is defined by the 38.2% Fibonacci of the 2022 High/Low drop and the descending trendline form that peak, but the common currency will need fresh catalyst in order to extend its rebound above them.

Despite the two week-advance, EUR/USD faces pushback ahead of the aforementioned critical technical level and as long as is stays below it, the broader bias remains to the downside and could eventually lead to fresh lows towards 1.0339. However, is may be early to talk about that, but it is in risk of fresh weekly lows (1.0556).

The economic calendar contains releases that could determine the pair's next leg, mainly today's US GDP and Friday's inflation update in the form of the US PCE.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.



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