FUNDAMENTAL
OVERVIEW
USD:
The US dollar rallied
across the board on Wednesday following the FOMC decision as the market
interpreted as more hawkish than expected. The Fed hiked interest rates by 25
bps as widely expected in an unanimous decision. Moreover, the part saying that
inflation remained elevated in part reflecting supply shocks was removed. The
SEP showed an upward revision for growth and inflation, and downward revision
for unemployment.
The most important
thing was the dot plot where the Fed projected just one more rate hike in 2026,
with rates staying higher throughout 2027 before rate cuts in 2028. That was
more dovish compared to market’s pricing which saw one more rate hike in 2026 and
two more in 2027.
I think this shows that the Fed has low appetite for an extended tightening cycle. Fed Chair Warsh
mostly repeated his Jackson Hole speech, but he was still seen as being more
hawkish. I’m not sure why.
Anyway, the market
brought forward rate hike expectations for October, with the probability rising
to 57%. I guess that’s because Warsh mentioned that they want to see a timelier
return to the 2% target.
Looking ahead,
watch carefully the situation in the Middle East as $100 oil, rate hikes and
elevated bond yields might put more pressure on Trump to end the war. We might
be already entering a de-escalation phase as Trump called a meeting with Gulf
leaders on Tuesday on the sidelines of the UN General Assembly in New York to
discuss the next steps in the war with Iran. Notably, the Iranian delegation
will be allowed to participate. A de-escalation would send oil prices lower,
easing inflation and rate hikes concerns, ultimately weighing on the greenback.
Economic data will
also be key. When positioning and market expectations become stretched, even a
modest shift in the data can trigger a significant reversal. If the US data
starts surprising to the downside, expectations for aggressive rate hikes will
likely be reduced and US dollar longs will get quickly unwound.
EUR:
On the EUR side, the ECB delivered a 25 bps rate hike
last Thursday,
taking the deposit rate to 2.50% as widely expected. The more hawkish takeaway
came from the inflation outlook and the ECB’s growing concern that the Middle
East-driven energy shock could keep price pressures elevated for longer. The
ECB now sees headline inflation at 3.0% in 2026 and 2.5% in 2027, with both the
2027 and 2028 inflation forecasts revised higher.
The decision also came with
a stronger growth assessment, with the ECB upgrading its 2026 and 2027 growth
forecasts as the euro-area economy has proved more resilient than expected.
This gives policymakers somewhat more room to keep tightening despite the
inflation shock.
The most important
development came after the decision. ECB sources indicated that
policymakers are already discussing another hike as early as the October meeting if energy prices remain
elevated and inflation risks continue to broaden. Lagarde herself did not
pre-commit to October though, stressing a data-dependent and meeting-by-meeting
approach, so traders will keep focusing on the data and the Middle East
situation.
EURUSD TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that EURUSDbroke below the key 1.1560
support and extended the losses into new lows following the FOMC decision. The
natural target for the sellers should be the major support zone around the 1.14
handle. If the price gets there, we can expect the buyers to step in with a
defined risk below the support to position for a rally into new highs. The
sellers, on the other hand, will want to see the price breaking lower to
increase the bearish bets into new lows.
EURUSD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we
have a downward trendline defining the bearish momentum. If we get a pullback,
the sellers will likely lean on the trendline with a defined risk above it to
keep targeting new lows. The buyers, on the other hand, will look for a break
higher to pile in for a rally into the 1.1560 resistance.
EURUSD TECHNICAL ANALYSIS –
1 HOUR TIMEFRAME
On the 1 hour chart, there’s
not much we can add here as the sellers will have a better risk to reward setup
around the downward trendline, while the buyers will need a break above it to open
the door for further upside. The red lines define the average daily range for today.
UPCOMING CATALYSTS
On
Tuesday, we have the Trump meeting with Gulf leaders and on Wednesday we get
the Flash Eurozone and US PMIs.
This article was written by Giuseppe Dellamotta at investinglive.com.