EURUSD consolidates in narrow range ahead of Fed interest rate decision

After the EURUSD pair slipped below parity on 14 July, prices rebounded as buying interest kicked in amid the lowest exchange rate in almost two decades. At the time of analysis on 26 July, the pair is consolidating in a narrower range ahead of a series of key economic events this week. The US Dollar Index (DXY), which gauges the greenback’s strength against a basket of rival currencies also retraced from its 20 year high to hover above 106.

ECB’s first rate hike in 11 years

One of the recent key development on the EURUSD was the European Central Bank’s (ECB) move to raise benchmark deposit rate by 50 bps last week. This interest rate decision, which brought ECB interest rate from 0% to 0.5%, surprised markets, which held the consensus of only 25 bps hike. ECB President Christine Lagarde also defied her own guidance of a 25 bps hike and said that they would be depending on data to decide on rates, without setting any targets.

In a typical scenario of interest rate hike, especially one that is larger than expected, the nation’s currency tends to appreciate, as higher yields would draw capital inflow. However, the EURUSD was unfazed by the announcement and this may be due to recession fears that weighs on the euro.

Downbeat German data weighs on EU economic outlook

The EURUSD may not have attracted as much buyers due to the concerns that a tightened monetary policy at times of economic slowdown would further stifle economic growth, leading to a recession. The recession fear is backed by the recent release of the German IFO Business Climate Index which plunged to 88.6 in July, lower than the expectations at 90.5. The index measures entrepreneurs’ sentiment about the current business situation and their expectations for the next 6 months. Amid the Eurozone energy crisis made worse by the Russia-Ukraine war, the economic situation remains fragile.

Safe haven flows into USD during this risk off environment may also provide headwinds for the EURUSD to advance higher.

Technical Analysis

At the time of analysis on 26 July, the pair is consolidating in a symmetrical triangle on the 4-hourly chart with a possibility of a bullish breakout. In the event of a breakout, the technical target is set around 1.0350, which coincides with another horizontal support-turned-resistance level.

On the daily chart, the EURUSD remains largely in a downtrend as it is captured in a falling channel that extends back to February 2022. Despite the rebound from parity, the rally stalled before the Relative Strength Index (RSI) could hit the neutral line at 50, signalling there may be more selling than buying interest.

In the short term, we anticipate that prices may advance to test 1.035 (R1) and this level should cap the pair from further gains. As long as prices stay below R1, the downside risk back to parity (S1) remains present.

Tuesday, July 26

USD – Housing Price Index (MoM)(May), S&P/Case-Shiller Home Price Indices (YoY)(May), Consumer Confidence(Jul), New Home Sales (MoM)(Jun)

Wednesday, July 27

EUR – Gfk Consumer Confidence Survey(Aug), 10-y Bond Auction

USD – Durable Goods Orders (Jun), Durable Goods Orders ex Defense (Jun), Durable Goods Orders ex Transportation (Jun), Nondefense Capital Goods Orders ex Aircraft (Jun), Pending Home Sales (MoM)(Jun)

Thursday, July 28

USD – Fed Interest Rate Decision, Fed’s Monetary Policy Statement, FOMC Press Conference, Core Personal Consumption Expenditures (QoQ)(Q2), Gross Domestic Product Annualized(Q2), Gross Domestic Product Price Index(Q2), Initial Jobless Claims(Jul 22), Initial Jobless Claims 4-week average(Jul 22), Personal Consumption Expenditures Prices (QoQ)(Q2)

EUR – Business Climate(Jul), Consumer Confidence(Jul), Germany Harmonized Index of Consumer Prices (YoY)(Jul)

Friday, July 29

EUR – France Gross Domestic Product (QoQ)(Q2), Germany Gross Domestic Product (QoQ)(YoY)(Q2), Germany Unemployment Change(Jul), Germany Unemployment Rate s.a.(Jul), Italy Gross Domestic Product (QoQ)(YoY)(Q2), EU Gross Domestic Product s.a. (QoQ)(YoY)(Q2), HICP (YoY)(Jul), HICP-X F,E,A,T (YoY)(Jul)