EUR USD Poised for a retreat

EUR/USD began to retreat on Tuesday after rising earlier towards major resistance around both its 200-day moving average and the key 1.1100 level. This retreat occurred after annualized US inflation data for November in the form of the Core CPI was reported to have risen a full 2.0% during the 12 months from November 2014. This data potentially provides further rationale for a Fed rate hike on Wednesday, boosting the US dollar and pressuring the EUR/USD currency pair.

After early December’s ECB-driven surge from key support around the 1.0500 level up above 1.0800, EUR/USD has been in somewhat of a consolidation that has gradually drifted higher towards the noted 1.1100 resistance level.

The ECB’s milder-than-expected action to stimulate the European economy during its last meeting in early December prompted a short squeeze for the heavily-sold euro. At the same time, a recent pullback for the heavily-bought US dollar ahead of this week’s Fed rate decision contributed further to the EUR/USD rise.

Despite this rise, however, the fact remains that the ECB and Fed are clearly on divergent paths when it comes to current monetary policy, and should continue to remain as such for the foreseeable future, unless some substantial fundamental change occurs in either or both economies. This places the broad directional bias for EUR/USD generally to the downside, at least from a longer-term perspective. This should especially be the case if the Fed raises interest rates on Wednesday, as expected, and leans more towards the hawkish side in providing some indication of further potential monetary tightening going forward.

From a technical view, as noted, EUR/USD has risen up recently to begin approaching major resistance around both the key 1.1100 level as well as the 200-day moving average. This moving average has been closely shadowing the 1.1100 level for the past three months, essentially acting as both support and resistance for the currency pair.

In the event that Wednesday’s potentially market-moving rate announcement from the Fed fulfills broad-based rate hike expectations, the US dollar should continue to find support against the euro, and EUR/USD should likely maintain its place below 1.1100 resistance. If this is to be the case, downside targets on a continued bearish trend remain at the major 1.0800 and then 1.0500 support objectives, with a longer-term target at parity (1.0000).