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EUR/USD Daily Forecast – Euro Recovers on Dovish Fed Rhetoric

Jignesh Davda

Fed William Introduces Volatility in the Markets

NY Fed President Williams surprised the markets yesterday in a week where many expected a drop in volatility.

Williams didn’t waste much time making his point. In the first paragraph of his speech, he stated that is better to take action now than to risk facing consequences later.

He justified that since monetary policy is near the lower bound, “It’s better to take preventative measures than to wait for disaster to unfold”.

The probability of a 50 basis point cut later this month jumped in the futures market to above 65% on the back of his remarks. In an unusual move, the New York Fed attempted to readjust expectations from his speech, which caused these probabilities to settle slightly lower. At the time of writing, the markets were pricing in about an equal probability of the Fed cutting 25 or 50 bps at their July meeting.

The dollar fell broadly alongside the rise in probabilities. While the major currencies gained against the greenback, the action was certainly in precious metals.

Specifically, the price of silver jumped above $16 to fresh highs for the year. It marked a fourth consecutive daily rise. Silver is up roughly 8% for the week and is on pace to post the largest weekly gain in about three years.

Later in the day today, we will hear from Fed members Bullard and Rosengren. After this, the Fed will enter a blackout period where FOMC participants will not be speaking publicly or doing interviews ahead of the July central bank meeting.

Technical Analysis

In yesterday’s forecast, I commented about the sluggish upward movement and general recovery since the sharp drop on Tuesday, triggered by the US retail sales beat.

That has certainly changed following the rise on the back of yesterday’s dovish Fed rhetoric. EUR/USD scaled above resistance at 1.1265, although failed to hold above there. Nevertheless, on an hourly chart, a bull flag pattern is in play.

EURUSD Hourly Chart

If bulls want to keep the upside momentum in play, I think dips towards 1.1237 should be met with buyers. So far, in the early European session, the pair is under a bit of pressure.

An attempt at 1.1265 has led to selling pressure in the near-term. On a hourly chart, a bearish engulfing candle seems to be in the making.

Bottom Line

  • I think yesterday’s Fed rhetoric has triggered a shift in the markets. I expect EUR/USD will be well supported on dips here.
  • A horizontal level at 1.1265 will be pivotal in the session ahead.
  • Support for the pair is found at 1.1237.

This article was originally posted on FX Empire