- EUR/USD is exhibiting a lack of clear directional momentum in the short term as market participants keenly await the Federal Open Market Committee (FOMC) meeting.
- The recent breach of the 100-period Simple Moving Average on the 4-hour timeframe suggests a potential advantage for bearish traders.
- However, the mixed technical signals observed necessitate a cautious approach before establishing positions anticipating further declines.
The EUR/USD pair is recovering from a dip during the Asian trading session, which saw it briefly test the 1.1280-1.1275 area on Tuesday. It has since edged higher, reaching a fresh daily high in the last hour, although the upside momentum remains limited. The pair is currently trading within a narrow range that has persisted for several days, hovering near the three-week low recorded last Thursday, as traders remain hesitant and prefer to observe from the sidelines ahead of the pivotal FOMC announcement scheduled for Wednesday. The market widely expects the Federal Reserve to maintain its current interest rate policy, but any hints about future rate adjustments will be closely scrutinized.
Leading up to this key central bank event, the robust US employment figures released on Friday and the better-than-expected US ISM Services PMI reported on Monday have alleviated some concerns regarding a potential recession in the United States. Consequently, this has provided some support to the US Dollar (USD), thereby acting as a moderating factor for the EUR/USD pair. However, the prevailing economic uncertainty, fueled by the US administration’s evolving trade policies, is preventing a more substantial rally in the USD. The ongoing trade negotiations between the US and China, as well as potential trade actions against other nations, continue to inject volatility into the currency markets.
From a technical analysis standpoint, the break below the 100-period Simple Moving Average (SMA) on the 4-hour chart last week – a level that had held since early April – is considered a significant signal for bearish traders. This breakdown suggests a potential shift in momentum towards the downside. However, the oscillators on the same 4-hour chart have not yet confirmed a negative bias and are currently positioned in bullish territory on the daily chart. This divergence in technical indicators suggests that it would be prudent to await stronger confirmation of downward momentum before committing to substantial short positions. Traders should look for a definitive break below recent support levels to confirm a sustained bearish trend.
In the immediate term, the 100-period SMA on the 4-hour chart, currently situated around the 1.1380 level, is likely to act as an initial resistance barrier, followed by the 1.1400 psychological level. A sustained move above 1.1400 should pave the way for the EUR/USD pair to overcome the 1.1425-1.1430 intermediate resistance zone and potentially target a retest of the 1.1500 level. A successful breach of 1.1500 could then open the door for a further advance towards the multi-year peak around 1.1575, which was reached in April.
Conversely, the 1.1265 area, representing the three-week low established last Thursday, is expected to provide immediate support and serve as a crucial pivot point. A decisive break below this level would likely trigger an extension of the EUR/USD pair’s corrective decline from the 1.1575 area, which represents the highest level since November 2021. In such a scenario, the pair could initially weaken towards the 1.1200 level before potentially falling to the 1.1140 area, which corresponds to the 200-period SMA on the 4-hour chart. Further declines below 1.1140 could target the 1.1100 level, a significant psychological support.
EUR/USD 4-hour chart
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.
EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.
The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.
Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.
A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.
Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
