EURUSD: “We Increasingly See Risks to the Downside”

Summary:

EURUSD pair declined in overnight trading as investors reacted to a the FOMC statement. Analysts at Danske Bank warn that the pair could continue falling

The EURUSD pair dropped in overnight trading as investors reacted to the Federal Open Market Committee (FOMC) minutes. The pair dropped from the two-year high of 1.1963 to an intraday low of 1.1827.

The EURUSD pair has been in a sharp upward trend in the past few months. It has risen from this year’s low of 1.0638 to almost 1.2000. This increase has been mostly because of the overall weaker US dollar as the number of coronavirus cases in the US have continued to increase. The policies of the Federal Reserve have also contributed to the rally in the EURUSD.

At the same time, economic data from Europe have been relatively strong. Inflation has started to pick up while retail sales, manufacturing and services PMIs, and industrial production have been doing well. Further, the EU has agreed to provide a broad-based stimulus package worth more than 750 billion euros.

The EUR/USD pair dropped overnight after the FOMC minutes for the meeting held on July 31^st. The minutes showed that the Fed officials were concerned about the US economy and the ballooning public debt. At the same time, they called for congress to pass more stimulus to support the economy. Also, they sounded to be opposed to yield curve control, a program that is being implemented in Australia and Japan. They said that such a program will have minimal impacts on the American economy.

At the same time, analysts at Danske Bank believe that there are downside risks for the EURUSD. In a report yesterday, they said:

“While there is clearly a risk that mere momentum and elevated volatility may take the spot even higher, we increasingly see risks in the cross to the downside as the consensus story could be rewritten in coming months in favour of USD. “

EUR/USD technical chart

The daily chart below shows that the EURUSD pair has been in a strong upward trend in recent weeks. The price remains above the 50-day and 100-day EMAs. Also, it seems to be forming an equidistant channel as it finds strong resistance below 1.2000. The current price is slightly above this channel’s support.

Therefore, I suspect that the price will continue falling as bears target this support at 1.1800. If it moves below this support, it will mean that bears have prevailed, which will see the price continue falling. The alternate scenario is where the pair tests this support and moves upwards to test the two-year high at 1.1961.