EUR USD turns down on stronger dollar ahead of Fed

EUR/USD (daily chart shown below) dropped for a second consecutive day on Tuesday after rallying during virtually the entire course of last week. This drop occurred as the dollar surged against most other major currencies and gold slumped back down towards its one-month low ahead of Thursday’s Fed statement.

Prior to this week’s declines, EUR/USD had reached more than a two-week high at 1.1372, just short of key 1.1400 resistance, before pulling back.

With the Fed in major focus for this week, and indeed for the past few months, exceptional market volatility may be expected for the latter part of this week regardless of what the Fed decision outcome may be. The US dollar will clearly be among the most affected of all markets by this potentially pivotal event, and will drive the short-term direction of the EUR/USD.

From a longer-term perspective, however, whether or not a Fed rate hike materializes this week, the broad-based market assumption is that an initial rate hike will most likely take place by the end of this year, or at least shortly thereafter. This expectation should continue to lend overall strength to the US dollar, in turn helping to pressure EUR/USD.

Despite the currency pair’s recent bounces and recovery attempts both in August and just last week, the prevailing trend from May of last year continues to point unmistakably to the downside. Coupled with the strong likelihood of a Fed rate hike within the near-term foreseeable future, this EUR/USD trend is likely to be pressured further to the downside on a longer-term basis. This may present some potential opportunities for dollar dip-buying or, for EUR/USD traders, rally-selling.

If the currency pair continues to trade under the noted 1.1400 resistance level, the clear downside target continues to be at the 1.1100 support level, around where the 50-day and 200-day moving averages recently converged. With any breakdown below 1.1100, the next major target resides at the key 1.0800 support area, last retested in July.