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Andreas Zanin
Analysis | January 27, 2021

EUR/USD Trading: FOMC meeting

In terms of EUR/USD, we are long-term bearish and we are just below a key level of resistance – we see the EUR as a sell on rallies or on a break of support. Over the last week volatility has been low in this pair but today we have the Federal Reserve meeting and could well see an increase in volatility. Below find a summary of why we are bearish the Euro and why the Federal Reserve meeting could generate volatility in the pair.

We have the Federal Reserve meeting today and the market expects them to leave policy unchanged. The Fed are likely to leave monetary policy unchanged with the Fed funds target rate range staying at 0-0.25% – the Quantitative Easing program maintained at $80bn of Treasuries and $40bn of Mortgage-Backed Securities.

The market expects them to dovish and stress that monetary policy will remain highly accommodative but they won’t in our view be more dovish than the market is expecting. We expect to be cautiously optimistic – due to the fact the US economy has been resilient despite COVID, vaccinations are in progress and the major fiscal stimulus package from the Government is coming.

The market is heavily bearish the USD and we have the biggest long position in the EUR since 2011. on the chart below from CITIBANK we can see the size of the position and what happened in the past when speculators had similar size positions.

 

In terms of why speculators are so long the Euro – there has been the view the EU economy will outperform the US going forward and the Fed will keep interest rates low. The fundamentals though have changed in favour of the USD in our view. In terms of the EU economy its more impacted by COVID lockdowns than the US and the US  economy is clearly out performing the EU economy:

In terms of interest rates US bond yields have been rising which points to higher inflation and interest rates ahead. If we look at the  the spread in bonds it’s clearly in favour of the US which can be seen on the chart below:

The market remains bullish Euro but we think the big fundamentals favour the USD. The market view is  that the euro will hit 1.25 but keep in  mind It didn’t get there in 2017 when euro fundamentals were a lot more bullish than they are now with the ECB talking about raising rates and the Eurozone economy was outperforming which of course is not the case now.

Technical Analysis

On the chart below EUR/USD is just below the 1.22 level – if we were to break higher we would expect the break to fail and the EUR could be sold back through the level or off chart highs – If we dont rally higher and take out support at 1.2100 the euro could be sold with stop back behind the 1.2200 level. The size of the speculative long position points longer to a move down to 1.1800 then 1.1600 in our view if speculators exit on stop.

 

 

Research provided by LearnCurrencyTradingOnline.com

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