EUR/USD Rate Risks Larger Rebound as Bullish Sequence Unfolds

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EUR/USD continues pare the decline from the September-high (1.1815) as updates to the U.S. Consumer Price Index (CPI) highlight a diminishing threat for above-target inflation, and the exchange rate may stage a larger rebound over the coming days as it extends the bullish sequence from the monthly-low (1.1432).

Keep in mind, one dismal data print will do little to derail the Federal Reserve from its hiking-cycle as Chairman Jerome Powell & Co. largely achieve their dual mandate for full-employment and price stability, but signs of easing job/wage growth paired with the ongoing shift in trade policy may play a greater role in driving U.S. dollar price action as it curbs the central bank’s ability to ramp up the normalization process.

In turn, Fed officials may continue to project longer-run interest rate of 2.75% to 3.00% at the next quarterly meeting in December, and it seems as though the Federal Open Market Committee (FOMC) will resist calls to quickly unload the bloated balance sheet especially as the International Monetary Fund (IMF) cuts its world growth forecast for the first time since 2016.

Image of fed fund futures

With that said, lackluster data prints coming out of the U.S. economy may continue fuel the recent rebound in EUR/USD even though Fed Fund Futures still reflect expectations for another 25bp rate-hike in 2018, and the recent series of higher highs & lows brings the topside targets back on the radar as the Relative Strength Index (RSI) highlights a similar dynamic and reverses course ahead of oversold territory. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

EUR/USD Daily Chart

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Recent developments suggests EUR/USD will continue to track the broad range from August through September amid the failed attempt to test the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region, with the exchange rate quickly coming up against the Fibonacci overlap around 1.1640 (23.6% expansion) to 1.1680 (50% retracement). A break/close above the stated region raises the risk for another run at the 1.1810 (61.8% retracement) hurdle, which largely lines up with the September-high (1.1815).

For more in-depth analysis, check out the Q4 Forecast for the Euro

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— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.