WILL EURO’S DOWNTREND ACCELERATE?
The Euro extended losses against the US Dollar over the past 24 hours, with EUR/USD closing at its lowest since June 2020. The single currency has been under pressure aggressive selling pressure after this week’s Federal Reserve interest rate decision. There, Chair Jerome Powell confirmed expectations for a hike and wrapping up asset purchases under quantitative easing in March.
He also did not shy away from upholding a hawkish view, saying that “there is quite a bit of room to raise interest rates without threatening the labor market”. The United States unemployment rate sits at 3.9%, fast approaching pre-pandemic levels. However, the labor force participation rate remains far off from where it was before Covid.
Taking a look at the chart below, EUR/USD can be seen inversely tracking December 2022 Fed rate hike expectations. The latter is derived from Fed Funds Futures, showing that 4 rate hikes are fully priced in. On top of this, there are rising calls for a fifth hike by the end of this year. Quantitative tightening, or unwinding of the balance sheet, is also expected to start soon after the first rate increase.
With that in mind, EUR/USD will be closely eyeing US PCE data over the next 24 hours. This is the Fed’s preferred gauge of inflation, and the core deflator is expected to cross the wires at 4.8% y/y, up from 4.7% prior. If the December CPI report is to offer any prelude, a mostly in-line outcome may even offer breathing space for risk appetite, especially given how hawkish Fed policy bets are. Still, a stronger print risks amplifying market volatility and boosting demand for the haven-linked US Dollar.
EUR/USD TECHNICAL ANALYSIS
EUR/USD closed under the key 1.1169 – 1195 support zone that was established in late November. This followed a turn lower on key falling resistance from May. That has exposed the 78.6% and 100% Fibonacci extension levels at 1.1085 and 1.0977 respectively. Still, taking a look at RSI reveals positive divergence, a sign of fading downside momentum. This can at times precede a turn higher. Closing back above the former support zone may open the door to retesting the falling trendline. The latter could then reinstate the dominant downtrend.