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  • EUR/USD is holding around 1.10 the figure awaiting the outcome of the Fed.
  • Eurozone PMIs showing green shoots in the manufacturing sector. 
  • Fed on hold or dovish with lower yields could be favourable for EUR/USD bulls. 
  • EUR/USD hourly bullish momentum divergence could be a signal.

Ahead of the Federal Reserve Interest rate decision today, EUR/USD is on the back foot as the US dollar continues to climb in a strong trend which is targeting the December peek through 98.50 in the DXY (however, likely in need of correction). 

EUR/USD is currently trading at 1.10001 having traded at the lowest level, 1.0992, since Nov.29 and having travelled from a high of 1.1027. EUR/USD broke below a rising support line which met a support structure in the 1.1070s. Subsequently, the price fell through selling liquidity to the next support structure located at 1.0000 where the price is stabilising ahead of the Fed today. 

Fed on hold, will they flip dovish?

How the Fed decision will affect the markets? Join our analysts to discover it!

Today at 18.30 GMT / 13:30 EST Valeria Bednarik and Joseph Trevisani will analyze market reactions to the Fed’s decision. Is the Fed really comfortable with a wait-and-see stance? Stay updated here!

With the Fed largely expected to remain on hold over the coming months, investors may see risk-reward as not being attractive which could eventually start to weigh on the greenback. Today’s outcome will be a possible game-changer for the US dollar and supportive of the euro. 

Eurozone PMIs recovering

Meanwhile, with a new sheriff in town, Lagard, the European Central Bank has been a focus. The euro could find some solace from a supportive ECB via PSPP reinvestments over the next few months and with an improving outlook for PMIs, with manufacturing showing early signs of recovery and the service sector continues to grow, markets are more optimistic, as the chances of a recession seem to have fallen over the horizon, for now. Moreover, the concerns at the turn of the year that US President Donald Trump would look to raise a trade war with the Europan union have been dampened by positive rhetoric from both sides of late – President Trump is more distracted by the Presidential campaign this year. 

Coronavirus risks to EMs and the euro

The coronavirus has seen a swift flight to safety this year, with the US dollar picking up the slack elsewhere. What could be troublesome for the euro, is an indirect hit due to flows leaving the emerging markets. The euro is a funding currency. Using the euro as a funding currency and being long EM was not a bad strategy because it helped to circumvent or take out some of the Sino/US trade-war risk on the carry trade.

“While the fallout on the economic picture is still unclear, we see a key risk for EM sovereigns with weaker fiscal and external balance sheets as well as those more exposed to a slowdown in China,” analysts at TD Securities explained. 

“Aside from trade and investment channels (with EM Asia, Sub-Saharan Africa and commodity producers most affected), we would be concerned on a reversal in the strong investor sentiment in EM credit.”

Given the close ties EMs have with the Yuan and what goes down in China town, there is a risk that investors will start to pull their investments in the EMs and which would dampen the demand for the euro as a carry trade, especially if the eurozone starts to recover and the euro starts to rise due to economic fundamentals, meaning it will be more expensive to liquidate euro positions. 

EUR/USD levels

Meanwhile, we are seeing a divergence in the hourly tie frames between price and momentum which could indicate that there is a bullish tendency ahead of the Fed. Upside targets are located at buy liquidity through 1.1020, 1.1035 and 1.1070 (trendline support). To the downside, below 1.0980 and 1.0960, 1.0880 on the wide is the main target on a weekly support structure basis.