EUR/USD Levels Off at Support Ahead of Key Fed Decision – Outlook & Analysis

by Diego Colman, Contributing Strategist

US DOLLAR FORECAST – EUR/USD

The U.S. dollar was broadly flat against the euro on Friday (EUR/USD 0.0% at 1.0885) after a strong showing in the previous session, despite an uptick in U.S. Treasury yields, with many traders opting to stay on the sidelines and avoid large directional bets ahead of next week’s Federal Reserve’s decision.

Although the U.S. central bank is expected to keep its policy settings unchanged at its March meeting, there is no general consensus on what policymakers will say about the outlook. For this reason, volatility is likely to accelerate in the coming sessions across assets.

In terms of possible scenarios, traders should not be surprised if the FOMC adopts a slightly more hawkish stance in light of upside inflation risks, which have clearly materialized in the latest CPI and PPI reports released a few days ago.

While the Fed has stated that it intends to begin dialing back policy restraint at some point in 2024, stalled progress on disinflation, coupled with economic resilience, could force the institution to delay the start of its easing cycle and signal fewer rate cuts for the period.

Presently, markets are anticipating approximately three quarter-point rate reductions through year’s end. Should policymakers indicate an intention to deliver fewer cuts than currently priced in, we could see yields push higher across the curve, bolstering the U.S. dollar in the process.

EUR/USD FORECAST – TECHNICAL ANALYSIS

EUR/USD leveled off on Friday after falling sharply on Thursday, with prices hovering slightly above support at 1.0875. If this floor holds in the coming days, buyers may slowly start reentering the market again, setting the stage for a move towards 1.0980. On further strength, all eyes will be on 1.1020.

On the flip side, if technical support caves in, sellers may feel emboldened to launch a bearish assault on 1.0850/1.0835, an area where three significant moving averages intersect. Below this band, attention will be directed towards 1.0790 and 1.0725 thereafter.