EUR/USD Forecast: Euro could stay fragile unless Fed delivers a dovish surprise

December 21, 2023 10:48 AM +07:00
  • EUR/USD continues to fluctuate in a tight channel at around 1.0700.
  • The Fed is widely expected to hold the policy rate steady in the 5.25-5.5% range.
  • A hawkish dot plot could trigger another leg lower in the pair.

Eur Usd Forecast Euro Could Stay Fragile Unless Fed Delivers a Dovish Surprise Pipscollector - EUR/USD climbed above 1.0700 during the European trading hours on Tuesday but failed to stabilize there as the cautious market stance allowed the US Dollar to stay resilient against its rivals in the American session. Early Wednesday, the pair holds steady at around 1.0700.

The US Federal Reserve (Fed) is widely expected to leave its policy rate unchanged at 5.25-5.5% following the September meeting. The revised Summary of Projections (SEP) - the so-called dot plot- will be scrutinized by investors, who will want to know whether the US central bank still plans to raise the policy rate one more time this year.

In case the dot plot denies that the Fed is on track to hike the interest rate by another 25 basis points, the initial reaction could weigh on the USD and provide a boost to the pair.

In June, the dot plot showed that policymakers were expecting a total of 100 bps rate cuts in 2024. If that projection remains unchanged, the USD could struggle to preserve its strength. On the other hand, a downward revision to the total interest rate reduction forecast for next year could lift US yields and help the USD to continue to outperform its peers.

Market participants will also pay close attention to Fed Chair Jerome Powell's comments in the post-meeting press conference. A cautious tone on inflation, with rising energy prices complicating the outlook, could support the USD.

EUR/USD Technical Analysis

EUR/USD needs to rise above 1.0700 (psychological level, upper limit of the descending regression channel, 50-period SMA) and stabilize there to keep buyers interested. Above that level, 1.0750 (static level, 100-period SMA) and 1.0800 (psychological level, static level) could be seen as next resistances.

If EUR/USD stays below 1.0700, 1.0650 (mid-point of the descending channel) could be seen as first support before 1.0630 (static level) and 1.0600 (psychological level, static level).

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