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.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya