On Wednesday the 1st of May, trading on the euro closed down. With low market liquidity due to May Day celebrations taking place across Europe, the day turned out to be very volatile.
Ahead of the FOMC’s interest rate decision, the euro rose to 1.1250 on the back of strong Eurozone GDP figures for Q1, as well as a German inflation report for April. The dollar’s decline then gathered pace after a weak ISM manufacturing PMI in the US for April, which fell short of expectations, posting its lowest value since November 2016. This increased nerves ahead of the FOMC meeting.
The FOMC decided to keep interest rates within their current range of 2.25% - 2.5%. This decision was unanimous among all FOMC members. The next meeting in penciled in for the 18th – 19th of June. The euro continued its rise to reach 1.1265 before dropping to 1.1188.
The dollar rose across the board in response to Fed Chair Jerome Powell’s remarks that the regulator doesn’t see any strong arguments either way in terms of changing interest rates.
Day’s news (GMT+3):
- 09:00 Germany: retail sales (Mar).
- 09:30 Switzerland: real retail sales (Mar).
- 10:50 France: Markit manufacturing PMI (Apr).
- 10:55 Germany: Markit manufacturing PMI (Apr).
- 11:00 Eurozone: Markit manufacturing PMI (Apr).
- 11:30 UK: Markit construction PMI (Apr).
- 14:00 UK: BoE interest rate decision, BoE asset purchase facility, BoE quarterly inflation report, BoE minutes.
- 14:30 UK: BoE Governor Carney’s speech.
- 15:30 US: initial jobless claims (26 Apr).
- 17:00 US: factory orders (Mar).
- 20:30 Germany: German Buba President Weidmann speech.
The drop from 1.1265 amounted to 67 degrees. The pair broke through the trend line at 1.1219 before breaking out of the upwards channel made up of higher highs. The euro is currently trading 0.13% up at 1.1208.
What can we expect after the dollar’s rise overnight? I see two potential scenarios.
Scenario 1: a rebound from the 22nd degree with a subsequent drop below the 67th degree to 1.1180. The 22nd degree is right next to the LB. The rebound from here will tell us pretty much what to expect from the US session. The pair is rising without volume at the moment, which increases bearish sentiment.
Scenario 2: a slow price recovery below the lower boundary of the channel heading towards the 45th degree. Potentially a small decline as trading opens in Europe since the stochastic is looking down. If the pair stays around 1.12 for 12 hours, this signal will fade and buyers can continue towards 1.1230. The LB balance line will provide resistance.
I’m leaning more towards the first scenario. I can’t see the pair falling too far since a reversal model has been forming since the 18th of April that should see the pair rise above 1.13.