EUR/USD Post-Fed Bounce to Benefit from Hawkish ECB Rate Hike

Euro Outlook: EUR/USD

EUR/USD extends the advance from the weekly low (1.1108) even as the Federal Reserve tames speculation for an imminent change in regime, and the European Central Bank (ECB) rate decision may fuel the recent rebound in the exchange rate as the Governing Council is expected to further combat inflation.

EUR/USD Post-Fed Bounce to Benefit from Hawkish ECB Rate Hike

EUR/USD seems to be unfazed by the 25bp Fed rate-hike as it halts a six-day selloff, but the FOMC may continue to prepare US households and businesses for higher interest rates as ‘inflation remains well above our longer run goal of 2%.’

The prepared remarks from Chairman Jerome Powell suggest the FOMC will stick to its hiking-cycle as ‘the process of getting inflation back down to 2% has a long way to go,’ and it remains to be seen if Fed officials will project a steeper path for US interest rates as the central bank is slated to update the Summary of Economic (SEP) at the next meeting in September.

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Euro Area Economic Calendar

FOREX.com Economic Calendar

Until then, EUR/USD may stage a larger recovery as the ECB is anticipated to increase Euro Area interest rates by another 25bp, and more of the same from President Christine Lagarde and Co. may push the exchange rate towards the monthly high (1.1276) as ‘inflation has been coming down but is projected to remain too high for too long.’

With that said, the ECB rate decision may fuel the recent rebound in EUR/USD if the central bank keeps the door open to pursue a more restrictive policy, but the exchange rate may struggle to retain the rebound from the weekly low (1.1108) if the Governing Council delivers a dovish rate-hike.

Euro Price Chart – EUR/USD Daily

Chart Prepared by David Song, Strategist; EUR/USD on TradingView

• EUR/USD initiates a series of higher highs and lows as it extends the rebound from the weekly low (1.1108), with the move above the 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension) region bringing the monthly high (1.1276) on the radar.
• Need a break/close above the 1.1270 (50% Fibonacci extension) to 1.1280 (61.8% Fibonacci retracement) area to open up the 1.1430 (100% Fibonacci extension) to 1.1440 (61.8% Fibonacci extension) zone, but lack of momentum to hold above the 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension) region may undermine the recent rebound in EUR/USD.
• Failure to defend the weekly low (1.1108) may push EUR/USD towards the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) area, with a move below the monthly low (1.0834) bringing the June low (1.0662) on the radar.

Additional Market Outlooks

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--- Written by David Song, Strategist

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