Euro Braces for Fed Tightening Next Week

EUR/USD ANALYSIS

• Fed interest rate decision in focus next week.

EURO FUNDAMENTAL FORECAST: BEARISH

The Euro zone is under pressure from rising inflation due to commodity supply constraints (of which monetary policy cannot rectify) as well as its reliance on Russia/Ukraine. This has only exacerbated the divergence between the Fed and ECB respectively. Looking ahead to next week, the Fed’s interest rate decision dominates the calendar (see below) and is likely to incorporate a 25bps hike – almost fully priced in by money markets.

Source: DailyFX Economic Calendar

Strong labour and inflation data (40-year highs reached yesterday) should keep the 25bps outlook intact. Fed Chair Jerome Powell also stated last week that there is a possibility of one or two rate hikes greater than 25bps which shows the aggressive intent by the Fed to tackle inflation. Another bout of hawkish comments during the press conference could lead to additional downside on EUR/USD.

FED RATE PROBABILITIES

Source: Refinitiv

Particular attention will be paid to quantitative tightening, inflation forecasts, GDP and rate hike trajectory.

TECHNICAL ANALYSIS

EUR/USD WEEKLY CHART

Chart prepared by Warren Venketas, IG

The long-term symmetrical triangle on the weekly EUR/USD chart above shows the weekly candle holding above triangle support. A close above would give the Euro some breathing space from a technical analysis point of view going into next week. A weekly candle break below this key area of confluence will suggest the potential for significant decline towards subsequent support zones.

From a bullish perspective, the RSI indicator is showing higher highs of recent (in contrast to price action printing lower lows). This is suggestive of bullish divergence and traditionally is seen as a bullish signal however, this may only be temporary considering the current economic environment.

Resistance levels:

• 20-day EMA (purple)
• 1.1000

Support levels:

TENTATIVE IG CLIENT SENTIMENT DATA

IGCS shows retail traders are currently LONG on EUR/USD, with 63% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, recent changes in long and short positions have resulted in a mixed disposition.

Contact and follow Warren on Twitter: @WVenketas