EUR/USD tests key support

EUR/USD tests key support after Fed signals higher for longer

EUR/USD is currently testing a key support level after the Federal Reserve indicated a potential extension of higher interest rates.

Despite maintaining its benchmark interest rate at a 22-year high during its recent two-day meeting, the Federal Open Market Committee signalled its support for additional monetary tightening within the year and fewer rate cuts in the following year. The committee unanimously decided to keep the federal funds rate steady, ranging from 5.25% to 5.5%, aligning with the U.S. central bank's cautious approach in the latter stages of its fight against inflation.

In a statement, the committee emphasised its continued vigilance regarding inflation risks, highlighting that economic activity had been steadily expanding and job gains, while somewhat slower, remained robust.

These developments come in the wake of Tuesday's disappointing European inflation data, which reinforces the European Central Bank's stance of concluding its rate hike cycle that was announced last week.

On the back of yesterday’s newsflow, EUR/USD moved lower to retest a significant support level created by the end-May swing lows (see daily candle chart below). This support level represents six-month lows, and whilst the dominant trend in this market is firmly bearish, we may see buyers step in at such a key support level.

EUR/USD Daily Candle Chart

If we drop down a timeframe and zoom into EUR/USD’s 4hr candle chart (below), we can see that price is already responding to support.

Having broken below support during Asian trading hours, price has been driven back above the support level – forming a small bullish fakeout pattern.

EUR/USD 4hr Candle Chart

Risk management

Support and resistance levels are never guaranteed to hold and should be complemented by price action confirmation and further analysis.

This morning’s rate decision from the Bank of England has the potential to cause outsized volatility in European currency pairs. Traders should factor this risk into their position sizing, stop placement and trade plan.

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