Euro technical analysis: EUR/USD, USD primed for FOMC

EUR/USD talking points:

• EUR/USD sits in a bull flag formation on the weekly chart
• the US dollar hit Fibonacci resistance last week that’s since held the highs – will the Federal Open Market Committee (FOMC) lay the groundwork for USD bears to return?

EUR/USD sets bull flag ahead of FOMC

Much to the chagrin of European Central Bank (ECB) policymakers, it’s been a really strong past 12 months in the euro. While the initial market impact from the coronavirus pandemic was a surge of USD-strength, helping EUR/USD to set a fresh two-year low just above the $1.06 handle, the following 11 months were much different as buyers drove the pair back to and above the $1.2 handle.

The break above $1.2 finally showed up in late November, and that bullish trend ran into the New Year with EUR/USD eventually setting a fresh two-year high above the $1.23 handle in early January.

Since then, however, USD strength has been slowly creeping into markets as expectations begin to ramp for potentially faster rate hikes out of the FOMC. We’ll hear more on that matter tomorrow when the bank meets for their first update to economic projections since December, and markets are primed to read just how dovish the FOMC may continue to be.

In EUR/USD, the longer-term setup in the pair is currently showing a bull flag formation; marked by a strong upward trend that’s been pulling back in a somewhat orderly manner, taking the shape of a channel going in the opposite direction of the trend. Such formations are often followed with the aim of continuation, looking for the same buying pressure that’s driven the trend to prevail for a continued move higher.

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EUR/USD weekly price chart

Moving back to the focus of attention, and it’s the tone in the US dollar that will likely determine whether or not that EUR/USD bullish trend might continue.

So far in 2021 the US dollar has been surprisingly strong. But – the currency was very oversold coming into the New Year and there was even a falling wedge formation that had built – which is often approached with the aim of bullish reversals, which has largely played out in the first two and a half months of 2021 trade.

And as markets prime for possibly faster rate hikes or normalisation out of the Fed, that counter-trend move in the USD has so far continued this year, with the US dollar finding resistance at the 23.6% Fibonacci retracement of the 2020 major move. Putting that two and a half months bump in to context, and it’s really a rather minor pullback in the grand scheme of USD price action.

The big question is what might the Fed say that can elicit that move? Because seemingly each attempt to support the market in the recent past has been met by a stronger US dollar and higher Treasury yields.

US dollar weekly price chart: test of Fibonacci resistance