Title: EUR/USD Forecast: Modest US Dollar Rebound Insufficient to Alter Broader Trend Ahead of FOMC Decision
Author: Matthew Weller, FOREX.com
Original Article Link: [FOREX.com](https://www.forex.com/ie/news-and-analysis/eur-usd-outlook-slight-dollar-recovery-not-game-changer-fomc-key-risk/?amp=true)
The EUR/USD pair experienced a modest pullback to start the week as the US dollar gained limited ground. However, this minor recovery in the greenback has not significantly altered the broader uptrend facing the EUR/USD. The key market risk now shifts toward the upcoming Federal Open Market Committee (FOMC) meeting, which could introduce further volatility in the currency space.
This article provides an in-depth look at the recent EUR/USD price action, the underlying drivers of the modest US dollar recovery, and what to expect from the Federal Reserve’s upcoming policy decision.
Current Market Positioning and Recent Price Movement
After rallying for much of the past few weeks, the EUR/USD pair has seen a slight corrective move in recent sessions.
Highlights of recent price activity:
– The pair rose from 1.0650 in mid-April to a high near 1.0915.
– A modest retracement has reduced the pair to around 1.0850 at the start of the week.
– Dollar strength was responsible for slowing the euro’s momentum.
– Markets are now cautious ahead of the FOMC policy meeting, causing consolidation.
From a broader perspective, the EUR/USD retains its upward bias, supported by a combination of macroeconomic factors, technical momentum, and shifting market expectations surrounding both the European Central Bank (ECB) and the US Federal Reserve.
Drivers of the Dollar’s Slight Recovery
Although limited in scope, the recovery in the US dollar deserves closer examination. A variety of factors have contributed to the dollar’s temporary strength, including:
– Positioning: After a month of declining, the dollar had become oversold relative to major peers. This created conditions ripe for a technical pullback.
– Treasury yield stabilization: Yields on US Treasurys have found near-term support, particularly the 10-year yield, which has rebounded toward the 4.5 percent zone. Higher yields can attract foreign capital, boosting the dollar temporarily.
– Risk sentiment: A slightly more cautious tone returned to global markets amid geopolitical concerns, contributing to a mild preference for more defensive assets such as the US dollar.
Despite these short-term tailwinds, structurally, the dollar remains under pressure due to a range of factors tied to interest rate expectations and economic differentials between the US and the Eurozone.
FOMC Meeting Looms as a Key Risk Event
The upcoming FOMC meeting is set to be the most significant risk event for EUR/USD this week. While no change is expected to the benchmark federal funds rate, traders will be keenly focused on the forward guidance provided by Fed Chair Jerome Powell.
Key questions driving market expectations include:
– Will the Fed push back more assertively against rate cut expectations?
– How does the Fed interpret the recent inflation and growth data?
– Will policymakers express renewed concerns about price stability?
As of the most recent data, markets have largely priced out any rate cuts through at least September, reflecting a shift in market psychology. Nonetheless, any deviation between Fed communication and market positioning could prompt notable volatility.
Potential outcomes from the FOMC announcement:
– Hawkish Outcome (Dollar Positive):
– Chair Powell articulates ongoing inflation concerns.
– The committee’s forward guidance projects a higher-for-longer rate scenario.
– June rate cut speculation is definitively dispelled.
– Dovish Outcome (Dollar Negative):
– Powell emphasizes symmetrical risks and slowing economy.
– Inflation is described as transitory or responsive to tightening.
– Committee acknowledges potential need for easing in late 2024.
Traders should prepare for whipsaw price action
Read more on EUR/USD trading.