Euro Slides as US Dollar Regains the Upper Hand on a Consistently Hawkish Fed

Euro, EUR/USD, US Dollar, Fed, FOMC, Daly, Treasuries, Energy – Talking Points

• Euro support wilted after US Dollar resumed strengthening
• The Fed reminded markets of their intention and yields responded
• If the northern winter is a harsh one, will EUR/USD resume its downtrend?

EUR/USD was unable to overcome parity this week despite the US Dollar weakening broadly against other currencies. The market had built up hopes for an end to the aggressive tightening stance of the Federal Reserve. Those hopes have been dashed.

San Francisco Fed President Mary Daly, among other Fed speakers, has been busy over the last few days making sure that the market is ready for another large hike at the next Federal Open Market Committee (FOMC) meeting in early November.

So far this week, she has referred to inflation as ‘corrosive’, ‘toxic’ and ‘problematic’ and that the pain that she is hearing from people is on the inflation side, not on the jobs front.

The market is pricing in a 75 basis point hike and the 1-year Treasury yield is again approaching 4.20%.

On the other side of the Atlantic Ocean, the European Central Bank are also anticipated to hike by 75 basis points at their meeting on the 27th of October. Minutes from their last meeting will be released later today and might shed more light on their thinking going into the October meeting.

The impending northern winter presents significant risks for the continent with energy sources under enormous strain. While many member states have scrambled quite well to shore up reserves, an alternative to completely replace Russian supply is some way off and may impact several aspects of the European Union’s economy, least of all industrial production.

With the Fed re-iterating their hawkish stance and the underlying economic frailty of the Euro zone, the descending trend for EUR/USD might be intact.

EUR/USD TECHNICAL ANALYSIS

EUR/USD remains in a descending trend channel after failing to overcome the upper band of that channel. A close above it and the 55-day simple moving average (SMA) could suggest bearish momentum might be dissipating.

For now, the price remains below the 55- and 100-day SMAs, near the 21-day SMA and above the shorter term 10-day SMA. This could suggest that underlying bearish momentum is still evolving but that near term momentum is stalling for now.

The peak earlier this month at 1.0198 and this week’s high of 0.9999 may offer resistance ahead of a cluster of break points and a previous high in the 1.0340 – 1.0370 area.

Support could be at the break point of 0.9864 or the recent low of 0.9536.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter