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EURUSD to Get More Clarity After FOMC & Dutch Elections

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The euro has been consolidating near a 15-year low with the first two months of the year showing no major movements in the currency pair. While there are significant fundamental risks to the single currency in the form of the elections in Europe this year, the euro has been so far muted.

However, this is likely to change over the coming weeks especially as at least two major events will pass through, which could provide more clarity to EURUSD in the run-up to the first round of French elections in April.

Fed rate hike could add short-term noise to EURUSD

On March 15, the U.S. Federal Reserve will be meeting for the monthly monetary policy meeting. Short-term interest rates in the U.S. are all set to be hiked this month, a factor that looks to have been priced in already.

The 30-day Fed funds futures is evidence to this with the futures contracts already trading at 0.87%, breaching past the 0.75% threshold and confirming the move in the short-term interest rates.

The euro could at best see some knee-jerk reaction, but for the most part, further declines are unlikely to come as a direct result of this Wednesday’s rate hike news from the Fed.

In the short term, the focus will, of course, be on the future path of rate hikes. The expectations currently stand at July and December as the next FOMC meetings where rates could be hiked. The expectations for the year stand at the Fed funds rate near 1.25% – 1.50%.

However, a lot is left to how the U.S. economy will perform in the coming months, especially with fresh data from the first quarter of the year likely to weigh on Fed decisions later down the line.

Dutch elections could set the tone for the rest of Eurozone

On the same day, the Netherlands will be heading to polls. This event will offer short-term volatility to the markets, especially the EURUSD.

However, the impact from the outcome of the Dutch elections could be mixed. While a vote to the current incumbent party in the Netherlands could breathe some relief and potentially put pressure on Marine Le Pen’s campaign, nothing is set in stone.

For now, the expectations are strong that the Dutch elections will lead to another coalition type of government which could see the Freedom Party’s Geert Wilders definitely not in a position to lead the government. Still, nothing is impossible as the markets learned last year.

A surprise victory by the Freedom party could strengthen the prospects for Le Pen and also raise the stakes for a potential breakup of the European Union.

EURUSD – Weekly Bear Flag pattern

Technically, the EURUSD longer-term charts point to a potential bearish continuation that could push the single currency below parity against the U.S. dollar following the weekly bearish flag pattern that was validated.

EURUSD is currently seen bouncing off the previous support level that was established near 1.0462. A breakdown below this level could spell further declines in EURUSD, initially towards parity and possibly to the first target at 0.9522 and eventually to 0.8328 on a further continuation towards the final target. This could put EURUSD to the late 2000 lows.

EURUSD Weekly Bear Flag
EURUSD Weekly Bear Flag

Last week, EURUSD got some support following the hawkish comments from ECB’s Draghi regarding future course for interest rates and QE. This sent the euro briefly higher, but further short-term risks come from tomorrow’s FOMC meeting and the Dutch elections.

Alternately, the upside scenario could be shaping up on only a breakout above $1.10, in which case we could expect EURUSD to rally towards $1.144 at the very least.

The EURUSD technical chart aptly reflects the fact that the risks in the Eurozone are balanced at the moment but anything can happen.

Traders should watch the 1.0462 (or 1.0450) level for EURUSD and on the timing at this level. If a breakdown of this level occurs closer to the French elections, this could set the tone for further declines in EURUSD which could potentially send the single currency to test parity between April – May.

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