EUR/USD trading between key levels on 1.11 handle, it hangs in the balance of the Fed’s statement

• EUR/USD on its knees above 1.10 handle as traders weigh up the ECB.
• EUR/USD bulls relying on dovish Fed and depend on a solid EZ services sector.

EUR/USD is currently trading at 1.1156, up 0.11% on the day having made a high of 1.1161.  While markets get set for the Federal Reserve interest rate meeting outcome, there was a last-minute focus on a string of key data releases form both the US and Europe.  

The US Conference Board consumer confidence surged to 135.7 in July from 121.5, compared to expectations for a 125 print. The present situations index rose to 170.9 (from 164.3), with expectations at 112.2 (from 97.6). “The strength in the forward looking indices suggests a positive start for US private consumption heading into the second half of the year,” analysts at ANZ bank argued.  

Then, the US monthly PCE inflation data for June were in line with expectations, with headline rising 0.1% m/m (1.4% y/y) and core up 0.2% m/m (1.6% y/y). “The 3-month annualised rate of core PCE is 2.4%, up from 0.6% in Q1, signalling that the period of low inflation at the start of the year has passed,” the analysts at ANZ argued.

Eyes now on EZ services sector to propel ECB into action

As for Europe, things remain troublesome there for the European Central Bank that seems intent on a path of rate cuts and QE. The Confidence in the industrial sector in Europe continued to fall in July, with industrial confidence dropping to -7.4 from -5.6 (the lowest reading since August 2013). However, weakness remains concentrated in the manufacturing sector, as services confidence held up better at 10.6 from 11.0. What markets are looking for is a drop in the services sector to propel the ECB into action and the euro a lot lower.  

Hawkish Fed cut on the cards?

As for the FOMC tomorrow, it is expected to deliver a 25bp rate cut. With crosscurrents persisting and inflation remaining subdued, the market is expecting the Federal Reserve to leave the door open to further easing but to avoid pre-committing to further cuts.   However, a blatant hawkish cut and where the  statement will  show only modest, mark-to-market changes with an overall upbeat assessment of the economy could be the clincher for the single currency.  This should be bullish for the Dollar going forward over the next weeks for its carry status vs the ECB’s precommitment to QE.

EUR/USD levels

Analysts at Commerzbank explained that EUR/USD continues to sit just above 1.1110/06, the April and May lows:

“We would consider a close above 1.1176/81 (mid June low and March low) enough of a trigger to signal recovery to the 55 day ma at 1.1240 and the highs from last week at 1.1285.”

“But while capped here it will remain on the defensive. Below 1.1100 will introduce scope to the 1.0974 2018-2019 support line, which in turn guards the 78.6% retracement at 1.0814/78.6% retracement.”