EUR/USD Correction Remains in Focus Ahead of ISM Non-Manufacturing

EUR/USD Rate Talking Points

EUR/USD trades near the October high (1.1180) ahead of the ISM Non-Manufacturing survey, and the exchange rate may make another attempt to test the August high (1.1250) as the Relative Strength Index (RSI) continues to track the bullish formation carried over from September.

EUR/USD Correction Remains in Focus Ahead of ISM Non-Manufacturing

EUR/USD may stage a larger correction as the Federal Reserve cuts the benchmark interest rate for the third time in 2019, and fresh data prints coming out of the US may fuel the advance from the yearly-low (1.0879) as the shift in trade policy drags on the economic outlook.

The reaction to the ISM Manufacturing survey leaves the US Dollar susceptible to the weakness in business sentiment, and the gauge for service-based activity may trigger a similar response if the index fails to meet market expectations.

In turn, the Federal Open Market Committee (FOMC) may continue to reverse the four rate hikes from 2018 as the “weakness in global growth and trade developments have weighed on the economy and pose ongoing risks.”

Image of Fed interest rate forecast

It remains to be seen if Fed officials will project a lower trajectory for the benchmark interest rate when the central bank updates the Summary of Economic Projections (SEP) in December, but it seems as though the FOMC will keep the door open to further embark on its rate easing cycle as Chairman Jerome Powellpledges to “respond accordingly” to the economic outlook.

In contrast, the European Central Bank (ECB) led by Christine Lagarde may stick to the sidelines at the next meeting on December 12 as former-President Mario Draghi pushes monetary policy into uncharted territory.

As a result, the Governing Council may largely endorse a wait-and-see approach over the remainder of the year as the central bank reestablishes its quantitative easing (QE) program in November. At the same time, President Lagarde and Co. may tame speculation for additional monetary support as ECB officials emphasize that “governments with fiscal space should act in an effective and timely manner.”

With that said, the reaction to the Fed’s forward guidance raises the scope for a larger correction in EUR/USD, with a break above the October range opening up the August high (1.1250).

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EUR/USD Rate Daily Chart

Image of EUR/USD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly low (1.0879) in October.
  • The recent correction in EUR/USD may continue to evolve amid the reaction to the October Fed rate decision, with the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) on the radar as the Relative Strength Index (RSI) continues to track the upward trend carried over from September.
  • Need a break/close above the 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) region to open up the overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion), with the next area of interest coming in around 1.1340 (38.2% expansion).

For more in-depth analysis, check out the 4Q 2019 Forecast for Euro

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.