“The FOMC outcome was broadly as we expected. The DOTs was the main tool of communication. However, the lack of urgency on show to lift inflation we believe will limit the appetite for renewed selling of the dollar. We remain in consolidation mode with a EUR/USD range of 1.1600-1.2000 set to hold over the coming months,” said analysts at MUFG Bank in their weekly report.
The pair swings, but it continues to trade in the 1.1750 - 1.1920 range. So far, the best trade appears to be to play the inside the range: buying around 1.1750 and selling on approximation to 1.1900.
The relationships between the EUR/USD pair and the S&P 500 weakened over the last weeks. As the currency pair remains sideways, the S&P 500 turned lower. Could this anticipate a correction in the EUR/USD? It is a signal to watch, particularly if equity prices accelerate to the downside. If they bounce to the upside, the odds of a break higher in EUR/USD will rise.
The US dollar is still a safe haven. Probably more because of the essence of the currency and not necessarily because of the US economy. If equity markets drop sharply, the US dollar’s strength could be better played versus other currencies like NZD, GBP or MXN, but still, EUR/USD would be under pressure.
Gold (XAU/USD) and silver (XAG/USD) are among the top performers of the year so far. Like the EUR/USD, both assets have been moving sideways over the last few weeks. Considering the current correlation between gold and EUR/USD, a break higher in gold could suggest new highs for EUR/USD, while the opposite also stands.
A higher correlation between gold and EUR/USD could likely be reflecting more of the shape of the US dollar. So, what the greenback does, measured by the DXY, could be another factor to take into account when looking for signs about where EUR/USD could go.
“With investors now long of EURs and short of USDs there is the potential for a correction that would take EUR/USD lower in the months ahead. We have tweaked our EUR/USD forecasts pushing them higher to better recognize the structural changes that have taken place since the spring. However, we continue to expect a dip lower in EUR/USD back towards 1.16 on a 3-month view and 1.14 in 6 months,” mentioned analysts at Rabobank.
A bullish breakout in EUR/USD has the first target near 1.2100. If the euro continues looking for a 250 pips objective (height of the range), it could be seen around 1.2250, which is also a strong barrier that should limit the upside, giving way to some consolidation or a correction lower. On the flip side, a slide below 1.1720 should point to further losses. The next strong supports might be located at 1.1500 and 1.1450.
Technically speaking, there is room for a correction lower. However, in the long term, the monthly chart shows the bullish trend intact and healthy, with a clear way up.
What happens with markets and especially in Wall Street is always relevant and has the potential to trigger moves all around. Bond yields are also another factor, but at the moment, with no expectations of change in central bank’s rates, economic data could hold the key for moves in yields that will surely impact on the FX and commodities market.
In the very short term, among key events will be Fed’s Powell presentation at Congress. It will be the first since the Fed announced its new strategy. Regarding the euro, at ING they see as relevant events the update on the September confidence readings through the flash PMIs and the German Ifo. “If the EUR can survive these, then the market moves onto the EU summit (24-25 September).
Topics on the agenda include the EU’s response to tension in the eastern Mediterranean and also to Russia. There are also suggestions that more detailed support for the EU capital market union will be presented – positive for the EUR if it raises the prospect of a deeper pool of European securities to rival the dollar.”
