Early on Wednesday, EUR/USD tested the resistance at 0.9900, the lower band of the Bollinger Bands indicator on the daily chart. The US dollar advanced amid rising geopolitical tensions and the upcoming monetary policy decision by the Federal Reserve. The euro is retreating against all major currencies, boosting the bearish momentum of EUR/USD. The European currency is even falling against the Japanese yen, which has been on the decline against the euro for the past several months.
EUR/USD is moving downwards, but opening short positions until the Fed meeting concludes would be quite risky. The market has already priced in a 75 basis point interest rate increase. Now, market players are focused on the tone of the FOMC statement and remarks by Jerome Powell. If traders regard the Fed's stance as insufficiently hawkish, the US dollar could retreat in the short term against major currencies, including the euro. Going short on the US dollar can be considered during this period. In the medium term, EUR/USD would remain under significant pressure, no matter how the US dollar would react to the current events.
The euro is vulnerable. The energy crisis, geopolitical tensions and stagflation risks make EUR/USD bulls distrust the pair's upward movements. Its upward corrections are driven by the weaker US dollar and not the stronger euro. The latest events are putting additional pressure on the European currency.
Yesterday, a pessimistic economic outlook was released by the German central bank. According to the Bundesbank, the Germany economy is already contracting, and the situation would likely deteriorate in the near future. The bank's analysts said that economic activity may pull back somewhat this quarter and shrink markedly in the autumn and winter months, due to falling gas consumption or rationing.
In mid-summer, major European industrial consumers of energy warned that a lack of fuel and the resulting rationing measures could force some factories to cease production. Reports in the media, such as the Financial Times, noted that EU residents could face power outages in addition to falling industrial production.
Currently, the pessimistic scenario is unfolding. According to the report by the International Monetary Fund on energy price growth, which was released in July, electricity prices are expected to increase in the EU by 73% on average. Gasoline and natural gas prices in Europe could rise by 36% and 122% percent respectively, the report said.
The energy crisis is weighing down on the euro, preventing the European currency from regaining the initiative. This factor has overshadowed all other fundamental factors – the EUR rally following the ECB's hawkish rhetoric and a 75 bps hike was very short-lived.
EUR/USD price dynamics would depend on the rhetoric of Jerome Powell and the tone of the statement following the Fed meeting. In addition, market players would focus on the Fed dot plot. If outlooks by Fed policymakers on interest rates would only be moderately increased compared to July's outlooks, this would provoke a negative reaction among USD bulls.
Surprising the market and triggering a US dollar rally would be a difficult task for the Federal Reserve, FX strategists at Commerzbank noted in an outlook. A 75 basis point hike has already been fully priced in by the market, and the US dollar's performance would depend on remarks by Jerome Powell and the published outlook.
If traders interpreted the results of September's Fed meeting as negative for the US dollar, EUR/USD bulls could launch an upward move targeting 1.0080, the upper band of the Bollinger Bands indicator on the daily chart. This target is currently the main price barrier for upward retracement. In this scenario, short positions could be opened once the pair's upward momentum fades. Regardless of the meeting's end result, the euro will remain under pressure in the medium term. If EUR/USD moves into the 1.0050-1.0080 area, its downward targets are 1.0000, 0.9950, and 0.9900.
