Euro edges higher as expectations grow for Fed to deliver clarity on balance sheet tightening

The euro rose as expectations grow for the Wednesday FOMC decision to confirm The Fed’s dovish message last week that the balance sheet runoff could end earlier than expected.  The dollar also fell after a successful US Treasury auction on $40 billion of two-year notes saw the interest rate differential narrow.  ECB’s Draghi also delivered testimony to the European Parliament that was in-line with last week’s rate decision.  Draghi did note they do not need more stimulus to combat the growth slowdown.

The broader moves in FX land have been more focused on the US story, but that could change over the next couple months.  Any rally with the euro could be limited as the weakness in Germany is showing no signs of stabilizing and the European Parliamentary elections at the end of May could see the populist movement grow and more power given to euro-skeptics.  The German IFO reading last Friday showed sentiment fell the most in almost six years, and we could see the German slowdown continue if China continues to decelerate.

The German rebound is probably around the corner, but we may see investors wait until we get clarity that the China-US trade war continues to make progress towards a longer-term deal.

The euro could see further gains if the Fed delivers signals they could downgrade their interest rate hike forecast at the March meeting and if they provide greater clarity on how and why the balance sheet runoff will end earlier than they thought.

Price action on the EUR/USD daily chart shows that initial resistance lies near the 100-day SMA, which is around 1.1450, with major resistance coming from the 200-day SMA, which trades around the 1.1571 level.  To the downside 1.1300 remains key support.

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