EUR/USD may extend some of its recent gains if the ECB rate decision and subsequent press briefing by the newly-instated President Christine Lagarde cools 2020 easing expectations. Yesterday’s FOMC outlook certainly helped push EUR/USD higher after markets interpreted Fed Chairman Jerome Powell’s commentary as unexpectedly dovish.

10-Year Government Bonds, EUR/USD, XAU/USD

10-year US government bond chart created TradingView

POST-FOMC ANALYSIS: WHAT HAPPENED?

US 10-year government bonds and gold prices rose at the expense of the US Dollar following the press briefing with Mr. Powell. While he did cite sold job growth as well as strong consumption, he did acknowledge that investment and exports have been weakening. He also added that sluggish growth from abroad and trade-related developments have been weighing on the central bank’s forecasts.

The Chairman re-iterated his position that policy is not on a pre-set course and that officials will adjust monetary conditions in the case of a material change. He also added that the Fed is strongly committed to achieving its 2 percent inflation target and warned that persistently low inflation could be unhealthy. He also said that price growth would need a significant and persist rise before the Fed hiked rates again.

Given the most recent CPI report, where all indicators beat their forecasts, it appears the journey to strong price growth is off to a good start with a year-on-year reading showing a 2.1 percent rise for November. The Fed also removed “uncertainty” from their outlook with the dot plot signaling a hold through 2020 as current rates remain “appropriate” for supporting growth and job creation.

Regardless of Mr. Powell’s words, overnight index swaps are still pricing in a 25-basis point rate cut for the end of 2020. One of the biggest fundamental risks that threaten to derail the Fed’s outlook is the US-China trade war. If relations continue to improve – or at the very least, not escalate – economic data may continue to marginally improve and lend greater credence to the Fed’s decision to remain neutral

EURO TRADERS EYE ECB RATE DECISION, CHRISTINE LAGARDE OUTLOOK

While markets are largely expecting for the European Central Bank to hold borrowing costs at -0.50 percent, volatility will likely come from the content of President Christine Lagarde’s speech. Earlier this year, she broadcasted an alarming message for Euro bulls when she said the central bank had not “hit the lower bound on interest rates”.

As outlined in my other Euro forecast, the Eurozone faces growing debt risks as the propensity for investors to chase riskier and higher-yielding assets is magnified in an environment of low interest rates. While the central bank is prepared to easing credit conditions if economic conditions worsen, it is unclear whether the potential stimulative effect it may provide in the short term will be offset by the consequences down the line.

EUR/USD TECHNICAL ANALYSIS

Since reaching the November 29 swing-low at 1.0981, EUR/USD has risen around 1.40 percent and is now aiming to test critical resistance between 1.1162 and 1.1182. Clearing that multi-layered ceiling opens the door to another possible uptrend like the one formed in October before it experienced a bearish correction Looking ahead, buying pressure may soften as the pair approaches the lower bound and traders’ resolve is tested.

EUR/USD – Daily Chart

EUR/USD chart created using TradingView