Tug of War: ECB’s Efforts, Fed’s Pause & the Dollar’s Climb

EUR/USD’s Technical Landscape: Divergence in Play

The Euro hit a 3-month low against the US Dollar, despite the European Central Bank’s efforts to combat inflation. The ECB announced the 10th consecutive rate hike last week, bringing it to 4.50%. The central bank also toned down growth expectations for 2024.

Last week’s upbeat U.S. data boosted the Dollar Index (DXY) to its 9th week of gains, while the Euro has been dropping for 9 weeks straight against the greenback. This week is all about the Fed Meeting where we expect to see a pause. Some have dubbed this a ‘hawkish pause’, mainly because Fed Chair Powell may leave the door open for another hike. Any potential hike is likely to be “data-dependent,” a term we’ve become accustomed to by now.

Currently, there’s a 99% chance that the Fed will keep the rate unchanged at this week’s meeting and a 73% probability it will do the same in November. The data is provided by CME’s FedWatch Tool.

Key Releases for the Week Ahead

The first and probably most important event of the week is the U.S. rate announcement, scheduled for Wednesday at 6:00 pm GMT. The FOMC Statement will reveal the interest rate votes, the rate itself, and the details of the reasons that influenced the decision. The FOMC Economic Projections will reveal how the Fed perceives economic growth and inflation over the next 2 years.

At 6:30 pm GMT, Fed Chair Powell will hold the usual press conference, during which he will outline the reasons for the rate decision. More importantly, he will probably offer clues about the future path of the U.S. monetary policy. It is usually the time when volatility rises the most.

Thursday at 11:00 am GMT, the Bank of England is expected to hike the rate to 5.50% from the current 5.25%. We will also get the Monetary Policy Summary, which will reveal the reasons that stood behind the rate decision.

Friday is PMI day, with the Eurozone Services and Manufacturing PMIs coming out at 8:00 am GMT and followed at 8:30 am GMT by the same indicators for the UK economy. Their U.S. counterparts come out later in the day, at 1:45 pm GMT.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0670, just above the support at 1.0635. It looks like we may have a temporary bottom in place. This doesn’t necessarily mean that the US Dollar’s grip is loosening but it’s a warning that we may see a bounce higher.

The RSI didn’t make any bearish advancements although the price has been constantly traveling lower. This is a form of bullish divergence and as we’ve seen countless times, divergence often triggers a reaction on the charts.

Keep in mind that the FOMC rate announcement and any forward guidance provided by Fed Chair Powell during the presser will likely affect the behavior of the greenback against its major counterparts.