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As Choppy Conditions Prepare for the Fed’s Powell Meeting, the EUR/USD Pair Moves Into the Bearish Side

Leon Kramer

ByLeon Kramer

Jan 31, 2024
As Choppy Conditions Prepare for the Fed’s Powell Meeting, the EUR/USD Pair Moves Into the Bearish Side

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  • EUR/USD experienced a strong surge above 1.0880 due to expectations of an ECB rate cut.
  • The US ADP labor report’s failure caused the pair to retreat to the levels seen at the start of Wednesday.
  • Jerome Powell, the head of the US Federal Reserve, dashed market expectations for a potential interest rate cut in the near future.

EUR/USD experienced a significant surge in early Wednesday trading, climbing three-quarters of a percent from its lowest point to its highest point. This rally was triggered by disappointing German Consumer Price Index (CPI) inflation data.

As a result, market sentiment shifted towards caution after Federal Reserve (Fed) Chairman Jerome Powell emphasized the importance of inflation figures aligning with the Fed’s 2% target rather than simply reaching it. 

The EUR/USD currency pair retreated to the initial bids around 1.0850 before declining further after the Federal Reserve decided to keep their primary policy rate unchanged. Fed Chair Powell emphasized the unpredictable economic outlook and reiterated the importance of gaining more assurance that inflation will reach and sustain 2%. 

German retail sales declined on Wednesday, followed by German CPI inflation easing more quickly than anticipated. This news has boosted investor confidence that the European Central Bank (ECB) will move towards implementing rate cuts at a faster pace.

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Before Powell’s Appearance, the EUR/USD Currency Pair Moved Closer to the Middle

  • The EUR/USD surged to 1.0880 following the release of disappointing German retail sales data. The figures showed a decline of -1.7% for the year ending in December, which further worsened from the previous period’s -2.4%. This indicates a cooling in consumer spending and reinforces the ongoing economic slowdown, which may prompt the ECB to consider rate cuts.
  • The rate of German CPI inflation decreased more than anticipated, as the annualized German CPI for the year ending in January was recorded at 2.9%, lower than the predicted 3.3% and the previous period’s 3.7%.
  • The release of the Pan-European Harmonized Index of Consumer Prices (HICP) data is scheduled for Thursday.
  • Money markets in Europe are currently factoring in a potential 150 basis point decrease in ECB interest rates by 2024, which is higher than the previous swap rate balance of 140 bps observed on Tuesday.
  • Fed Chair Jerome Powell is scheduled to appear at 19:30 GMT, and market participants will eagerly search for any indications that the Federal Reserve may lower interest rates soon.
  • The US ADP employment change dropped to 107K in January, falling short of the projected 145K and decreasing from the revised figure of 158K from the previous month.
  • The eagerly anticipated US nonfarm payroll (NFP) data will be released on Friday, marking the end of the trading week.
  • The Federal Reserve decided to maintain the current policy rate, emphasizing the prevailing economic uncertainty and the importance of obtaining more reliable indicators that inflation will reach and sustain the desired 2% target.
  • Money markets are still anticipating a rate cut from the Fed in March, but there was a slight decline in risk appetite due to the possibility of a mediocre performance by the Fed.
  • Rate swaps currently indicate a high probability of at least a 25 basis point reduction in Fed rates by the upcoming May meeting.
  • The Federal Reserve has decided to keep the policy rate steady at a range of 5.25% to 5.5%, which is in line with expectations. Powell emphasizes that it is highly probable that the peak has been reached in terms of interest rates, and the Federal Reserve is in complete agreement that rates will need to be reduced at some point this year.
  • However, the Federal Reserve must observe a decrease in inflation and ensure that it remains at the 2% threshold for an extended period. This would indicate that the markets might still be excessively optimistic about the possibility of interest rate cuts.
  • Jerome Powell discusses the policy outlook following the decision to maintain an unchanged interest rate.

EUR/USD Is Poised for a Run After the Federal Reserve’s Announcement

EUR/USD experienced fluctuations on Wednesday, initially dropping to 1.0806 before rebounding above 1.0880 and eventually returning to its original level near 1.0850, as investors eagerly anticipated Fed Chair Powell’s remarks. The EUR/USD pair extended its decline following the Federal Reserve’s decision to maintain interest rates at their current level. As a result, the pair tested the 1.0820 support level. 

Following Fed Chair Powell’s remarks on Wednesday, the duo swiftly surged towards the lower range, aiming to test the 1.0800 level.

The 200-hour Simple Moving Average (SMA) continues to act as a significant technical obstacle, limiting any upward momentum around the 1.0860 level. The EUR/USD has been trading within familiar levels since the middle of January, but there is increasing downward pressure as the swing highs continue to decline. 

The daily candlesticks show that the pair is currently trapped at the lower end of a congestion pattern near the 200-day SMA around 1.0850. The price movement on the upside is limited by the 50-day SMA, which is slightly above 1.0900.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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