EUR/USD yo-yos following back-to-back central bank decisions and ongoing uncertainty

In an unusual bit of timing, we have had two significant monetary policy decisions within two days. Yesterday, 26^th July, the Federal Reserve raised interest rates by another 25bps, bringing US interest rates to their highest level in 22 years. The move had been priced in by the market for some time now, but what did surprise the markets somewhat was Jay Powell’s unusually dovish remarks following the decision:

“I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted, and I would also say it’s possible that we would choose to hold steady at that meeting. We’re going to be making careful assessments . . . meeting by meeting.”

He also noted that most economists now believe that the US will be able to avoid a recession in the coming months, despite the elevated borrowing costs and the knock-on effect on the economy.

This prompted many analysts and traders to assume that the Fed´s monetary tightening cycle might finally be over.

“We think that the Fed is done raising rates,” said Bob Michele, chief investment officer at JPMorgan Asset Management. “We see enough signs of inflation moderating. By the time they meet in September, that is likely to be evident in both inflation and the growth.”

There was little market reaction, though the USD weakened against the EUR as traders took bets that the European Central Bank (ECB) would continue its hawkish stance in combatting inflation.

The EUR/USD continued to rise steadily throughout the day today, 27^th July, as traders looked ahead to the ECB’s interest rate decision. Surprising no one, ECB raised rates by another 25bps – bringing the eurozone’s interest rates to 3.75%, its highest-ever level.

More interesting was the ambivalent tone taken by Christine Lagarde following the decision, providing no guidance on a potential September rate hike. When questioned, she said: “We might hike, we might hold. We are not in the domain of forward guidance, but we are firmly rooted in our determination to break the back of inflation.” The eurozone is almost certainly heading for a recession, and many economists and policymakers are concerned that the ECB’s monetary response has been too aggressive.

Following the ECB’s decision and press conference, the EUR/USD fell below 1.105, losing its gains, as analysts and traders digested the accompanying notes and Lagarde’s comments. The EUR has been in overbought territory for some time and, with an incoming recession, looks vulnerable to further bad economic news.

EUR/USD Technical Analysis

Following the ECB rate hike, the EUR/USD fell over 70 pips in an hour, heading strongly towards oversold territory after breaking the 1.2500 level last week. This bearish move could see a break below the psychological 1.1000 level, with the 100- and 200-day MAs (yellow and pink) and the 78.6 Fibonacci retracement level acting as potential support at around 1.0900. The July swing-low of 1.0840 will be another level to watch if the EUR/USD continues downwards.