EUR USD Could the near term uptrend weather the Fed maelstrom

We’ve finally arrived at the day of the long-awaited September Federal Reserve meeting, with the outlook for interest rates still about as clear as mud. According the CME’s FedWatch tool, Fed Funds futures traders are pricing in 25% chance of rate hike, but other indications are seemingly more optimistic. For instance, the 2-year treasury yield, which is particularly sensitive to Fed interest rate expectations, has risen to its highest level since early 2011, while 49% of respondents in a recent CNBC survey anticipated the Fed to raise rates in today’s meeting.

As we noted in our full Fed preview yesterday, the most likely outcomes are that the Fed holds steady but hints at a rate hike later this year or that the central bank raises interest rates, but talks down expectations for further increases in the near-term. Both of these “middle of the road” options could lead to less volatility than many market participants expect, and crucially, could allow some of the recently-formed trends to extend further.

On that note, EUR/USD could be posed for more short-term upside after the initial post-Fed volatility. The pair has been trending generally higher since bottoming under 1.05 back in March, and the trend has actually accelerated over the last month. The unit has now held above its 200-day MA for the last week, and after dipping down to test that level at 1.1225 yesterday, buyers stepped in to push the unit back above 1.1300. This price action created a clear Piercing Candle* on the daily chart, signaling a two-day shift from selling to buying pressure and hinting at further gains heading into the weekend.

Meanwhile, the secondary indicators are constructive, if not overtly bullish. The MACD is holding steady above the “0” level, showing bullish momentum, while the RSI continues to hold above the “40” level that typically provides support within a healthy uptrend.

If EUR/USD can hold above its near-term bullish trend line and the 200-day MA (a big “if” with the Fed meeting looming), further gains toward major previous resistance at 1.1450 are possible. However, if those converging support levels are conclusively broken, then a move down toward the 50-day MA near 1.1100 or longer-term trend line support at 1.10 could be next.

*A Piercing Candle is formed when a candle trades below the previous candle’s low, but buyers step in and push rates up to close in the upper half of the previous candle’s range. It suggests a potential bullish trend reversal.

Source: City Index