EUR/USD – poised for major decline?

<p>It is just one week before next Thursday’s potentially pivotal US FOMC statement and federal funds rate announcement, where the Fed will announce its decision […]</p>

It is just one week before next Thursday’s potentially pivotal US FOMC statement and federal funds rate announcement, where the Fed will announce its decision as to whether or not it will raise interest rates and, if not, create further speculation as to the possible timing of a future rate hike. Fluctuations in market expectations for this rate hike have long driven short-term oscillations in the value of the US dollar against other major currencies, but have mostly supported and propped up the greenback. Whether or not interest rates are raised next week, a broad market assumption is that an initial rate hike will likely take place either by the end of this year or early next year.

As for the euro, one week ago the European Central Bank (ECB) issued a statement during its press conference that left interest rates unchanged at record low levels, lowered its inflation and economic growth forecasts, and indicated a willingness to extend its bond purchasing program if needed.

As interest rates are the primary driver of currency valuation, this dichotomy between the US and the Eurozone with respect to probable interest rate momentum should serve to apply continued long-term pressure on the EUR/USD currency pair.

With the distinct possibility of additional ECB quantitative easing and continued low interest rates in the Eurozone, as well as the probability of an impending interest rate hike in the US, the directional bias for the EUR/USD continues to be strongly to the downside.

EUR/USD Daily Chart

 

From a technical perspective, EUR/USD has been consolidating for the past week in a relatively tight trading range above major support around the 1.1100 level. The currency pair is also trading just above both its 50-day and 200-day moving averages, which have converged for the first time since June of last year. The current consolidation occurs within the context of a two-and-a-half week retreat from late August’s high above 1.1700.

Currently, EUR/USD has formed a rough inverted flag pattern which, if broken to the downside, could provide the momentum to move the currency pair significantly lower. With any sustained breakdown below the flag pattern and the 1.1100 level, as well as the noted moving averages, the key downside price target for the short-term continues to reside around the 1.0800 support level, last re-tested in mid-July. On a longer-term basis, continued declines for the currency pair should target further downside support around the 1.0500-area lows. Current upside resistance on any further rebound remains around the 1.1400 price level.

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