Ahead of the Federal Reserve’s meeting on Wednesday, EUR/USD is fluctuating within the upper 1.0800s range. Speculation is rising about potential changes in the Fed’s expected interest rate cuts for 2024. Additionally, several European Central Bank (ECB) officials are scheduled to speak at a conference on monetary policy.
Interest rates, set by central banks, play a crucial role in influencing foreign exchange markets. Lower interest rates often lead to currency depreciation, while higher rates attract more capital inflows.
EUR/USD Rebounds Amid Growing June Rate Cut Expectations
EUR/USD has slightly recovered before the March Federal Open Market Committee (FOMC) meeting, where potential interest rate cuts by the Federal Reserve are being closely watched. There is increasing speculation that the Fed might start reducing interest rates, currently set at 5.25%-5.50%, by June.
According to the CME FedWatch Tool, the probability of a rate cut by June stands at 64.0%, with a further increase to 78.9% by July. These probabilities have risen from the previous day, indicating a shift in market expectations.
Potential Changes in Fed Forecasts
While no immediate interest rate changes are expected from the Fed, there is anticipation that the quarterly forecasts and accompanying statement could be revised. This could alter the outlook for interest rates and subsequently impact the valuation of the US Dollar.
EUR/USD Volatility Expected After Fed Meeting
The outcome of the Fed meeting could lead to volatility in EUR/USD. There is speculation that the Fed might revise its economic forecasts, including the “dot plot” that reflects the future path of interest rates. Analysts suggest that the Fed might reduce its forecasted rate cuts for 2024 from three to two, considering ongoing inflationary pressures.
ECB Speakers’ Influence on EUR/USD
In Europe, debates continue regarding the timing of interest rate cuts, with differing opinions among ECB officials. Wednesday will witness several ECB speakers providing insights at a conference, including ECB President Christine Lagarde, ECB Chief Economist Philip Lane, and ECB Executive Board member Isabel Schnabel. Their remarks could influence EUR/USD volatility.
Technical Analysis Indicates Potential Decline in EUR/USD
EUR/USD has breached the key level of 1.0867, signaling a potential reversal of the short-term uptrend and suggesting a possibility of further losses.
Euro versus US Dollar: 4-hour chart
Subject to fundamentals, the price will probably continue to fall to the next key support level at roughly 1.0800 – the lows of wave B of the Measured Move that unfolded in February and early March.
Thursday’s sell-off fell to a low of 1.0835 before recovering and thereby forming a bullish Japanese hammer reversal candlestick pattern on the 4-hour chart. This was followed by a little move higher. Since candlesticks are only short-term patterns, this upside could be at risk of petering out.
The daily chart below is showing the Moving Average Convergence/ Divergence (MACD) momentum indicator crossing over the signal line, giving a bearish sell signal, and adding further evidence to a change of trend.
However, it is also flagging up some key barriers to progress lower in the form of dynamic support from the red 50-day and then the green 200-day Simple Moving Averages (SMA).
Euro versus US Dollar: Daily chart
On Tuesday price penetrated the 50-day SMA situated at 1.0848 but was repulsed by the 200-day SMA at 1.0839. As on the 4-hour chart, the price recovered and formed a hammer candlestick on the daily chart as well.
For confirmation of the hammer’s bullish reversal potential, Wednesday needs to end on a bullish note as a green candlestick. If that is the case, EUR/USD is likely to continue its recovery higher.
