EUR/USD: Double bottom breakout fails ahead of the Fed

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  • EUR/USD invalidates the double bottom breakout on Friday.
  • The market expects the Fed to cut rates by 50 basis points this year.
  • The ECB is seen keeping negative rates until Q2, 2023.

The bullish case for EUR/USD has weakened ahead of the FOMC (Federal Open Market Committee) rate decision due this Wednesday.

The currency pair closed well below 1.1263 on Friday, invalidating the double bottom breakout – a bullish reversal pattern – confirmed on June 6.

The American dollar picked up a bid after the US retail sales bettered estimates, dispelling the need for an immediate rate cut in July. As a result, EUR/USD will likely remain under pressure today and the support at 1.1199 (61.8% Fib retracement of 1.1107/1.1348) could come into play.

While the probability of a Federal Reserve (Fed) rate cut in July may have weakened, the market still expects the central bank to cut rates at least by 50 basis points this year.

Even so, a significant US Dollar weakness looks unlikely, as the Euribor rates indicate the European Central Bank (ECB) will keep the interest rates in the negative territory until the second quarter of 2023, according to Reuters.

Put simply, the long-run rate differential favors US Dollar strength and the path of least resistance for EUR/USD is on the downside. The short-term outlook, however, would turn bullish if the Fed boosts rate cut bets this week, sending the pair above the recent high of 1.1348.

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