EUR/USD plunges to three-month low amid Fed expectations

The euro-dollar exchange rate has been on a downward spiral for the past nine weeks, reaching its lowest level since June 2023. The main driver behind this bearish trend is the anticipation of the Federal Reserve’s monetary policy meeting this week, which could signal a more hawkish stance than the market expects.

Fed meeting in focus

The Federal Open Market Committee (FOMC) will hold its regular meeting on Wednesday, September 20, 2023, and announce its decision on interest rates and asset purchases. The market consensus is that the Fed will keep its policy unchanged, with the federal funds rate target range at 5.25-5.5% and the monthly pace of bond buying at $120 billion.

EUR/USD plunges to three-month low amid Fed expectations
EUR/USD plunges to three-month low amid Fed expectations

However, some analysts and investors are speculating that the Fed could surprise the market with a more hawkish tone, given the strong economic data from the US and the rising inflationary pressures. The Fed could hint at tapering its asset purchases sooner than expected, or revise its projections for inflation and interest rates higher.

If that happens, it could boost the US dollar and send yields higher, putting more pressure on EUR/USD. On the other hand, if the Fed maintains a dovish stance and downplays the inflation risks, it could trigger a relief rally in risk assets and support the euro against the dollar.

EUR/USD technical outlook

EUR/USD has fallen for nine consecutive weeks, a bearish sequence not exceeded since 1997. The pair has broken below several key support levels, such as the 200-day moving average, the 50% Fibonacci retracement of the March-June rally, and the psychological level of 1.08.

The pair is now trading around 1.0730, testing a rising trendline that has been in place since March 2023. A decisive break below this trendline could open the door for further losses towards 1.07 and 1.06.

The pair is also oversold on several technical indicators, such as the RSI and the Stochastic oscillator, suggesting that a corrective bounce could be due. However, any recovery is likely to be short-lived and face strong resistance at 1.08 and 1.09.

EUR/USD fundamentals

The fundamental backdrop for EUR/USD is also bearish, as the economic divergence between the US and the eurozone widens. The US economy has been showing robust growth and resilience, despite the challenges posed by the delta variant of Covid-19. The US GDP grew by an annualized rate of 6.6% in the second quarter of 2023, while the unemployment rate fell to 4.8% in August.

The eurozone economy, on the other hand, has been struggling with weak growth and low inflation. The eurozone GDP expanded by only 2% in the second quarter of 2023, while the unemployment rate remained at 7.6% in July. The inflation rate in the eurozone rose to 3% in August, but this was mainly driven by temporary factors such as energy prices and supply bottlenecks.

The monetary policy divergence between the Fed and the European Central Bank (ECB) is also weighing on EUR/USD. The Fed is expected to start tapering its asset purchases by the end of 2023 or early 2024, and possibly raise interest rates by mid-2024. The ECB, however, has signaled that it will keep its policy ultra-loose for longer, as it does not see inflation as a threat to its medium-term target of below but close to 2%.

EUR/USD outlook

EUR/USD is facing strong headwinds from both technical and fundamental factors, as well as market sentiment. The pair is likely to remain under pressure until there is a clear shift in the Fed’s outlook or a significant improvement in the eurozone’s economic prospects.

The FOMC meeting this week will be a key event for EUR/USD, as it could provide clues on the Fed’s future policy moves and its assessment of the economic conditions. The market will be closely watching for any changes in the Fed’s statement, projections, and press conference.

EUR/USD traders should also pay attention to other economic data releases from both sides of the Atlantic, such as the US retail sales, industrial production, housing starts, and consumer sentiment reports; and the eurozone consumer confidence, services PMI, and current account reports.

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