Fundamental Forecast for Euro: Bearish

Euro Talking Points

EUR/USD pares the sharp decline from earlier this month even as U.S. President Donald Trump tweets that ‘money is pouring into our cherished DOLLAR like rarely before’, but fresh comments from Federal Reserve officials may rattle the recent rebound in the exchange rate as the central bank appears to be on course to implement higher borrowing costs over the coming months.

The euro-area’s exposure to Turkey may continue to impact the near-term outlook for EUR/USD as U.S. Treasury Secretary Steven Mnuchin pledges to implement tougher sanctions against the country, and the geopolitical risks surrounding the monetary union may push the European Central Bank (ECB) to further support the economy as ‘uncertainties related to global factors, notably the threat of protectionism, remain prominent.’

In turn, the ECB’s account of the July meeting may highlight a dovish forward-guidance for monetary policy as President Mario Draghi & Co. stick to the easing-cycle, and the zero-interest rate policy (ZIRP) in Europe may continue to drag on EUR/USD especially as the Federal Open Market Committee (FOMC) looks to implement higher borrowing costs over the coming months.

With that said, the Kansas City Fed Economic Symposium in Jackson Hole, Wyoming may also influence EUR/USD as Chairman Jerome Powell is slated to speak at the event, and the central bank head may utilize the conference to prepare U.S. households and businesses for an imminent rate-hike as the Fed largely achieve the dual mandate for monetary policy.

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Hawkish comments from Chairman Powell may fuel bets for four rate-hikes in 2018 as ‘the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate,’ and the Fed’s hiking-cycle may keep EUR/USD under pressure, with the broader outlook tilted to the downside as the exchange rate snaps the range-bound price action from June.

Keep in mind, recent price action in EUR/USD suggests a larger rebound in underway as the exchange rate carves a fresh series of higher highs & lows, while the Relative Strength Index (RSI) bounces back from oversold territory to flash a textbook buy-signal.

EUR/USD Daily Chart

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Keep in mind, broader outlook for EUR/USD remains tilted to the downside following the break of the June-low (1.1508), but the failed attempt to clear the 1.1290 (61.8% expansion) region raises the risk for a larger rebound especially as the exchange rate carves a bullish sequence. Moreover, the RSI has snapped from oversold territory, but the oscillator may continue to exhibit a bearish behavior as it extends the downward trend carried over from the previous month. In turn, a break/close above the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region may spur a test of the former-support zone around 1.1510 (38.2% expansion).