Euro Stabilizes after Sharp Slide

Fundamental analysis of Forex market

The euro has edged higher on Wednesday, after sliding over 1% yesterday. In the North American session, EUR/USD is trading at 1.0147, up 0.29% on the day.

All eyes on Federal Reserve

The markets are eagerly awaiting the FOMC decision later today. The meeting is live, with the Fed expected to raise rates by 75bp for a second straight month, which will bring the benchmark rate to 2.50%. There is an outside chance that the Fed will opt for a massive 100bp move, as inflation shows no sign of peaking and hit 9.1% in June, up from 8.6% in May.

Even if the Fed delivers the expected 75bp increase, the move could shake up the currency markets. Investors will be paying close attention to the Fed’s guidance over the coming months and the tone of Powell’s rate statement and follow-up press conference. If Powell hints that a 75bp increase is coming in September, that would indicate a hawkish stance and the US dollar could gain ground.

The Fed decision comes just ahead of US GDP for the second quarter. After a soft reading of -1.6% in Q1, a modest gain of 0.5% is expected in Q2. The White House, fearing a second straight negative reading which technically defines a recession, is already in pre-damage control mode in case of a GDP decline in Q2, claiming that there are other ways to define a recession besides two consecutive declines.

The euro again finds itself uncomfortably close to the parity line, after a nasty slide on Tuesday. Investors reacted negatively to reports that Russia was slashing in half the gas flow in Nord Stream 1 to 20% of capacity. This has raised fears of an energy shortage in Europe this winter. The EU is scrambling to reduce its energy dependence on Moscow and announced on Tuesday that member states had agreed on a voluntary reduction of 15% in natural gas imports. Still, the agreement has wide holes, with exemptions for members that are not directly linked to EU gas pipelines and are completely dependent on Russia. EU members have to worry about their own citizens, which could make it difficult to have a united front against Russia.

German confidence indicators are pointing downwards, which isn’t surprising given the war in Ukraine and a potential energy crisis. Earlier in the day, GfK Consumer Climate fell 2.9 points to -30.6, below the estimate of -28.9. German consumers have been in a surly mood for months, as the index has been in negative territory since October 2021. The weak release follows Tuesday’s Ifo Business Sentiment, which dropped by 5.6 points to 88.6, shy of the forecast of 90.2.

EUR/USD Technical

  • EUR/USD has support at 1.0105 and 0.9992
  • 1.0191 has switched to resistance. Above, there is resistance at 1.0304

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