EURUSD seems to have capped off its selloff, as price is now retreating from the 1.2500 levels to the 1.2700 area. The dovish FOMC minutes boosted EURUSD when it indicated that the Fed isn’t likely to hike interest rates early next year.
A pullback could take EURUSD up to the previous support zone around the 1.2800 levels, as stochastic is just starting to make its way out of the oversold zone. This signals that buying momentum is in play and that a larger correction might be in the works.
EURUSD Trade Setup
A break above the 1.2800 mark could lead to a bigger retracement to the 1.3000 major psychological mark, which might also hold as resistance and keep the pair in a downtrend. MACD is hinting at a pickup in buying momentum as well.
If the selloff resumes, EURUSD could make its way back down to the former lows at 1.2500 or perhaps make new ones. After all, the trend remains strong and the path of least resistance for this pair is to the downside, as fundamentals favor a short euro bias.
Yesterday, ECB Governor Draghi reminded traders that the central bank has more easing tools that it can use when necessary. Recent data from the euro zone, particularly in Germany, has been much weaker than expected. Bear in mind though that the ECB has already cut several interest rates in two instances and is implementing targeted long-term refinancing operations, although these tools don’t appear to be generating the desired effect.
As for the Fed, the minutes of their latest meeting indicated that they’re worried about dollar strength and its disinflationary impact. However, the fact remains that the US economy is faring much better than the euro zone, keeping the downside fundamental bias on EURUSD. The market correction among dollar pairs may have been taken by dollar bulls as an opportunity to re-enter their long trades at better prices.