After the ECB announced that it was going to start purchasing bonds (QE) in March, the EUR/USD made another push lower until 1.1097 to start this week. We know that even before the announcement, it has been falling, so this could be an exhaustion push by the EUR/USD.
However, the EUR/USD decline is not only a euro-story, but also a USD-story, and whether the EUR/USD will rebound or continue to be pressured will depend on the FOMC’s announcement later today (1/28). This is a key FOMC meeting because US data has turned down slightly, and other central banks have been cutting rates, adding stimulus and becoming more dovish, putting pressure on the Fed.
In the 1H chart we can see that price has been rallying throughout the week and EUR/USD is now trading around 50% retracement of the decline that followed the ECB announcement. The RSI has pushed above 60 and reflects loss of bearish momentum.
Now, 1.1450-1.1465 area will be key. This area contains the 61.8% retracement and the 200-hour SMA. Basically a hold below this level would be a strong sign that bears are still in control. If the FOMC sounds like it is still on pace to raise rates by mid-2015, then we can expect this area to hold. If it does hold, or if a break above is quickly rejected, we should look for the bearish continuation attempt. A break below 1.13 should be another sign of bearish continuation, as this would put price back below the 200-, 100-, and 50-hour SMAs, and below this week’s flag pattern.
However, if the FOMC projects cautious and a delay to its rate hike plans, price should break above 1.1465. Also, the 1.13 level should become a support in the event of a throwback. This scenario would build a bullish outlook for the short to medium-term, and the levels EUR/USD was at before the ECB announcement (1.1650-1.17) will be first in sight.
Looking at USD/JPY for Clues:
We might want to observe the price action in USD/JPY as well to assess whether there is USD-strength:
USD/JPY has been consolidating between 117.17 and 118.85. If it breaks above resistance after the FOMC, we should expect EUR/USD to hold its resistance and threaten the 1.13 level for bearish continuation.
If USD/JPY falls below the consolidation support, expect EUR/USD to break 1.1465 and make a run towards last week’s highs around 1.1650-1.17.
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