EUR/USD: On the defensive as risk aversion overshadows dovish Fed

• EUR/USD looks to extend Wednesday’s drop, as stock markets remain weak. 
• Risk-off overshadows dovish Fed, boosts demand for the US dollar. 

EUR/USD suffers losses as risk aversion in stock markets overshadows the dovish Federal Reserve (Fed) and keeps the safe-haven US dollar bid.

Down 0.14%, eyes H&S support

The pair is trading near 1.2092 at press time, representing marginal losses on the day, and appears set to challenge the daily chart head-and-shoulders neckline support at 1.2052. 

• EUR/USD’s options market positioning is stacked against euro

The US Federal Reserve kept its bond purchase program and benchmark interest rate unchanged Wednesday and delivered a slightly more dovish message by acknowledging recent moderation in the economic activity and calling for higher inflation, as noted by BK Asset Management’s Kathy Lien. 

“The Fed is still a long way from meeting inflation and employment goals,” Powell said, adding that the bank will reveal its plans to taper well in advance. 

Even so, the dollar gained ground on Wednesday and is pushing higher at press time. The greenback’s resilience to the dovish Fed is likely due to stock market instability. 

The Asian stocks are tracking Wall Street lower. Major US indices fell by 2% on Wednesday on fears hedge funds may liquidate other investments to make up for losses registered in short positions in stocks such GameStop. 

• Wall Street’s fear gauge surges to highest since Nov. 2

Should the risk aversion worsen, the dollar will likely see stronger across-the-board gains, pushing EUR/USD lower to support at 1.2052. The futures tied to the S&P 500 have erased early gains to trade flat to negative. 

Data-wise, the focus would be on the preliminary German Consumer Price Index for January, scheduled at 13:00 GMT. A big beat on expectations is needed to help the euro score gains amid continued risk aversion. Also, the US Q4 Gross Domestic Product due at 13:30 GMT may inject volatility into markets. 

• ECB despot rate cut isn’t the way to counter Euro strength – IIF

Technical levels