EUR/USD – Will the Fed deliver a dovish final hike or add a hawkish twist?

• Fed and ECB will have a big role to play in EURUSD moves over the next 24 hours
• Will both offer a final dovish hike and emphasize data dependency?
• EURUSD faces a big test around 1.10 after breaking out earlier this month

EURUSD is trading a little choppy over the last couple of days with traders clearly heavily focused on the outcome of the Fed and ECB meetings.

In both cases, a 25 basis point rate hike is heavily backed in the markets, but at the same time, the language that accompanies the decision and what comes next is less obvious.

I think there’s every chance that in both cases, policymakers opt to accept that a pause at the next meeting may be appropriate while in no way closing the door on further hikes in the months ahead.

In other words, data dependency will be heavily emphasized with the overall tone perhaps being a dovish hike with a slight hawkish twist. The last thing policymakers want is for investors to perceive this to be the end of the tightening process but that will be a very tough message to get across, particularly in the absence of fresh forecasts.

The economic data has undoubtedly improved as far as inflation prospects are concerned while the economy is clearly weakening, furthering the case for a pause in September. Both of these factors will likely be emphasized when signaling that further hikes will depend on the data.

The pair has pulled back over the last week or so after finally breaking above 1.10 earlier this month.

EURUSD Daily

Source – OANDA on Trading View

A weaker dollar has stemmed from data in the US becoming more Fed-friendly – weaker inflation, softer economy – but this week the ECB will be equally as influential in determining whether the pair stays above 1.10 or slips back below.

Of course, the Fed is up first so it will set the tone to begin with. A hawkish Fed could strengthen the dollar and put pressure on support around 1.10, the lower bound of the range – 1.10-1.11 – that provided so much resistance over the course of 2023.

Anything deemed dovish could see the pair rally once more, in effect confirming the breakout earlier this month and potentially putting pressure on last week’s highs, maybe even beyond.

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