The US dollar took on a defensive stance on Thursday after the Federal Reserve (Fed) announced it was ready to cut interest rates to cope with rising global and domestic risks. The US bank regulator left interest rates unchanged, as expected, but said the possibility of interest rate cuts is on the rise, suggesting that monetary policy can be eased as early as next month as the increasing tensions in trade and rising concerns about weak inflation.
The US Dollar Index, which measures the strength of the greenback against six major rivals, fell slightly below 97.00 points after losing more than 0.5% overnight. As of 06:20 a.m. ET, the index is 96.66 points, navigating the area of multi-day lows. A breach of 96.46 (low June 7) would open the door for 96.04 (50% Fibo of the 2017-2018 drop) and then 95.82 (low Feb.28). On the other hand, the next up barrier emerges at 97.80 (monthly high June 3) seconded by 97.87 (61.8% Fibo of the 2017-2018 drop) and finally 98.37 (2019 high May 27).
Although the market has provided much of what the Fed said, the US dollar’s decline is still relatively high. The key issue is no longer whether the Federal Reserve will cut interest rates in July, and whether the reduction will be 25 or 50 basis points.
The yields on US government bonds declined after the Fed meeting, the dollar retreated against the yen. The yields on two-year bonds reached 1.737% on Wednesday, the lowest level since November 2017.
The Euro broke the psychological 1.1300 barrier against the US dollar, receiving a strong bullish boost from the FOMC decision. Euro’s sentiment improved strongly after the Fed confirmed its dovish stance and readiness to cut interest rates.
The technical picture has dramatically improved for the currency pair. Momentum on the four-hour chart has turned to the upside, and EUR/USD has crossed the 50, 100, and 200 Simple Moving Averages. On the other hand, the Relative Strength Index is touching the 70 level – entering overbought conditions – and implies a downside correction.
The single currency advanced 0.9% and shows scope for further rise as studies turned positive and maintain strong bullish momentum on the daily chart.
Close above daily cloud top is needed to confirm scenario and unmask key barriers at 1.1347 (high June 7) and 1.1353 (200 SMA). The next lines are 1.1395 and 1.1445, which date back to March.
Support awaits at 1.1270 which had the same role next week, then 1.1250 that capped the currency pair last week, and 1.1200 which provided support early this week.
The US dollar hit a new low at 107.46 (the lowest since January 3) in early European trading on Thursday, extending the late Wednesday’s post-Fed bearish acceleration.
Overnight’s comments from US President Trump about his authority to replace Jerome Powell as Fed chairman added to negative sentiment.
Bank of Japan kept the key interest rates unchanged at 0.1% but pointed to rising global risks and their impact on the Japanese economy, keeping opened government bond-buying program.
The US dollar’s fall was quite significant, despite that markets anticipated the outcome of Fed’s policy meeting and generated a bearish signal on the break of key supports at 107.81 (low June 5) and 107.56 (Fibo 61.8% of 104.59/112.40 rally). A daily close below these levels is needed to confirm the break and open way for further weakness. There are no significant obstacles on the way towards next support at 106.43 (Fibo 76.4%), violation of which would unmask key support at 104.59 (2019 low, posted after flash crash on January 3).
Some price adjustments on profit-taking could be expected before bears resume. Broken former key support at 107.81 now offers solid resistance, with extended upticks expected to remain below falling daily Tenkan-sen (108.13) to keep bears intact.