EUR/USD outlook: All eyes FOMC and ECB meetings – Currency Pair of the Week

Fawad Razaqzada
By :  ,  Market Analyst
  • EUR/USD outlook: Eurozone PMI weaker across the board
  • Will dollar resume lower after last week’s technical bounce?
  • FOMC and ECB policy decisions key for EUR/USD outlook
  • EUR/USD testing key support zone


Welcome to another edition of the Currency Pair of the Week.


The EUR/USD started the new week on the backfoot, falling in reaction to the latest disappointment from the PMI surveys in the Eurozone. But the downside was limited as investors looked forward to key interest rate decisions from the Fed and ECB later in the week. Despite its recent weakness, we continue to maintain a bullish EUR/USD outlook and wouldn’t rule out a move towards 1.15 in the coming weeks.


Eurozone PMI weaker across the board


Ahead of this week’s big central bank meetings, investors were once again reminded of the dangers high levels of inflation and interest rates are having on the global economy, by the latest PMI data – causing the EUR/USD to dip below the 1.11 handle. Both manufacturing and services sector PMIs from the Eurozone and UK missed expectations. It was once again the manufacturing data sector that raised recession alarm bells, with activity remaining deep in the contractionary zone below 50.0 across the region with the Eurozone average being 44.5 vs. 46.0 previously. In Germany, the eurozone’s economic powerhouse, the manufacturing PMI was a lowly 38.8, down from 40.6 in the previous month. This was the 13th month of declining activity, with the PMI gradually falling deeper in contraction. Meanwhile, the Eurozone services PMI came in weaker than expected at 51.5 vs. 53.7 previous.


The key takeaway point from the PMI surveys is that the Eurozone economy is continuing to struggle, especially the manufacturing sector, pointing to a recession in the single currency bloc. With price pressures also weakening, albeit more so for goods manufacturers – thanks to dropping input costs – than services providers, this should appease the ECB hawks slightly. But wage inflation remains a concern. For this reason, the ECB may be unwilling to provide a clear guidance for their September meeting. Insofar as this week’s meeting is concerned, a 25 basis point rate hike is a forgone conclusion – see below for more.


Will dollar resume lower?

The Dollar trimmed its monthly losses last week, finding support across the board. The greenback’s recovery looked to be driven by technical buying from oversold levels, as incoming US data last week wasn’t all great, except the weekly jobless claims and Empire State Manufacturing Index – both of which topping expectations. But retail sales, housing starts, building permits, existing home sales and industrial production all came in below expectations. In the week prior, both CPI and PPI came in weaker than expected, causing the Dollar Index to fall below 100. 

So, it remains to be seen whether the dollar’s recovery will hold this week as we head towards some key central bank decisions, two of which will have a direct impact on the EUR/USD outlook.


FOMC and ECB policy decisions key for EUR/USD outlook

Apart from the US PMI surveys later today, there’s not a lot on the economic calendar until the Fed meeting on Wednesday. Without a doubt, the upcoming policy decisions from the Fed and ECB will have the most significant impact on the EUR/USD outlook this week. So, let’s discuss those…


FOMC monetary policy

Wednesday, July 26

19:00 BST


The EUR/USD is going to move sharply on the back of the Fed’s rate decision, along with other dollar pairs on Wednesday. After 10 interest rate hikes, the Fed kept policy unchanged at 5-5.25% in June in a unanimous decision. However, the Fed made it clear in the policy statement, press conference and dot plots that two more rate increases was pencilled in for the remainder of the year. Since that policy meeting, the Fed official have largely remained consistent with this messaging. It looks like there is strong support among the FOMC for a 25-bps hike at this meeting, which is what everyone now also expects.

But in light of weakening inflationary pressures, investors are now wondering whether this meeting could mark the end of the tightening cycle.

So, a rate increase is a forgone conclusion. The Fed must decide whether to signal the likely need for one or more rate increase or whether to move to a more data-dependant mode. If it is the latter, then the market will see it as a clear signal of a pivot, which should hurt the dollar and underpin the EUR/USD – at least until Thursday’s ECB meeting anyway.

It is also worth noting that until the Fed’s September 20 meeting, there will be two further jobs reports and a couple of inflation reports that could significantly impact the Fed’s decision. So, even if the Fed re-iterates the need to hike more, whether the market will believe them is not a given. 

ECB monetary policy

Thursday, July 27

12:15 BST


It has been roughly a year since the European Central Bank started its hiking cycle. But now the end of the tightening cycle is near. Up until last week, investors were confident that there will be at least two more rate increases to come from the ECB this year. However, some dovish comments from ECB officials, including Klaas Knot, who said that monetary tightening beyond Thursday’s meeting is not guaranteed, saw investors reduce bets for a September rate increase.

So, there is now a bit more uncertainty as to what happens beyond July, but we will have some clarity come Thursday. The ECB may be less inclined to offer guidance on the September meeting, although many analysts still see ECB rates peaking at 4%, meaning an additional hike beyond Thursday’s meeting is still largely expected.

It will be worth listening to the ECB President Christine Lagarde, who last time was very hawkish. If her tone is not too dissimilar, this could help lift the EUR/USD outlook, potentially paving the way for an eventual rally towards 1.1500. However, a lot will obviously depend on the Fed’s message the day before, on Wednesday.


EUR/USD outlook: Technical Analysis

EUR/USD outlook


Despite its recent pullback, the EUR/USD outlook remains bullish from a technical standpoint. This is because we haven’t yet seen a major topping pattern or a lower low to suggest the long-term bullish trend has ended.

If anything, the EUR/USD is now at a potentially important support zone, between 1.100 to 1.1095 region. Previously a ceiling on several occasions this year, we could see the EUR/USD rebound and push higher again from this area. Beyond this area, 1.0900 is the next big level – this being the base of the prior rally.

The line in the sand is at 1.0833 for me. This being the last low hit in early July, prior to the latest rally to a new 2023 high earlier last week. If we break below this level, then we will have created out first lower low. At that point, therefore, I would drop my bullish EUR/USD outlook.

Incidentally, last week’s high came right in around the 61.8% Fibonacci retracement level (1.1275) of the big downswing that started in January 2021. This level is now the key target for the bulls to claim. If they do so successfully, then there’s not many further resistances until 1.1500.


-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R


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