Title: EUR/USD Outlook: July Highs Return to Focus Before Fed Decision
By Matt Weller, CFA, CMT | Adapted and Expanded Analysis
As the markets await the much-anticipated Federal Reserve interest rate decision, the EUR/USD currency pair has seen renewed interest from traders. With the pair once again rising near its July highs, investors are carefully scrutinizing signals from both the European Central Bank (ECB) and the Federal Reserve, as well as key economic indicators that could shape future monetary policy directions.
This in-depth article expands upon Matt Weller’s original analysis from Forex.com by delving deeper into the macroeconomic environment, technical picture, and possible future scenarios for the EUR/USD pair.
Macroeconomic Context Driving the EUR/USD
The EUR/USD exchange rate, which measures how many U.S. dollars it takes to buy one euro, is heavily influenced by macroeconomic factors including central bank policies, inflation trends, employment figures, and broader geopolitical events.
Currently, the pair is driven by a divergence in policy expectations between the ECB and the Federal Reserve. While the Fed is nearing the end of its rate-hike cycle, policymakers in Europe are hinting that more tightening might be warranted.
Key macro factors influencing the pair:
– Diverging inflation data between the U.S. and the Eurozone
– Market speculation around the Fed’s future rate decisions
– Mixed economic growth signals in both the U.S. and European economies
– Continued geopolitical uncertainty and its effect on global risk sentiment
– Softening U.S. labor market data leading into the Fed meeting
– Resilience of Eurozone data relative to expectations
EUR/USD Price Action Recap
The EUR/USD rate saw consistent gains in July before dipping in early August. Despite the short-term weakness, the pair has now rebounded, approaching the 1.1275 zone reached in July — a multi-month high. This resurgence suggests strong underlying bullish sentiment among market participants, though significant resistance looms large.
Recent price action overview:
– July: EUR/USD rallied as traders began pricing in a pause in the Federal Reserve’s tightening cycle.
– Early August: A modest retreat occurred due to renewed strength in U.S. economic data and hawkish Fed rhetoric.
– Mid-August: Stimulus concerns in China, weakening U.S. job openings (JOLTS), and soft ISM surveys contributed to dollar weakness.
– Late August: EUR/USD once again approached the July high near 1.1275 amid rising confidence that the Fed is nearing peak rates.
Federal Reserve Meeting in Focus
The Fed’s upcoming policy decision is of particular importance to EUR/USD traders. Although the market widely expects no change in the benchmark interest rate at this meeting, traders will watch for any nuances in Fed Chair Jerome Powell’s statement and the accompanying economic projections.
Key considerations for the Fed meeting:
– Fed Funds Futures currently imply roughly a 90 percent chance of a pause.
– Markets will weigh the likelihood of a final 25-basis-point hike before year-end.
– The Fed’s updated Summary of Economic Projections (SEP) will provide clues on inflation, unemployment, and growth forecasts.
– Chair Powell’s tone will be critical; a hawkish tilt could reignite USD buying and push EUR/USD lower.
– Conversely, a dovish outlook or acknowledgment of slowing economic growth could support the euro.
U.S. Economic Indicators Under Scrutiny
Several recent U.S. data releases have tilted expectations toward a less aggressive Fed. Key reports have shown signs of labor market fatigue and softening economic momentum.
Important U.S. economic data affecting the dollar:
– JOLTS report: Job openings fell more than expected, indicating reduced labor market tightness.
– ISM Manufacturing PMI: Remained in contraction territory, hinting at ongoing industrial weakness.
– ISM Services PMI: Showed weakening demand and softer price pressures.
– Core PCE inflation: While still elevated, it is trending lower, offering comfort to policymakers.
Read more on EUR/USD trading.