EUR/USD

The U.S. Federal Reserve is expected to hold interest rates steady today, cut the number of hikes projected for the rest of the year, and release long-awaited details of a plan to end the monthly reduction of its massive balance sheet.

The U.S. central bank since early this year has signaled a "patient" approach to increasing borrowing costs, drawing an end to a gradual, three-year cycle of monetary tightening marked by nine rate hikes, including seven during the 2017-2018 period.

Investors now put a 75% probability on the likelihood the Fed won't raise its overnight benchmark interest rate, or federal funds rate, any more this year.

New quarterly economic and rate projections to be released with the latest Fed policy statement will show how closely policymakers align with that view. The Fed's December projection called for two hikes this year, but that is widely expected to be cut to a single increase at the conclusion of the two-day policy meeting on Wednesday.

It would take a downward move by seven policymakers to bring the median expected number of hikes to zero for the year, a full half-percentage-point change that has happened only once since the Fed began making its "dot plot" of projections public in 2012.

The more intense focus among investors may be on the balance sheet, and the Fed's plans to stop reducing its holdings of Treasury bonds and mortgage-backed securities each month by as much as USD 50 billion.

Details of that plan are also expected to be released on Wednesday, providing investors with a sense of how much longer the drawdown will continue, and what will likely be left in the Fed's portfolio of assets when it stops.

EUR/USD bulls look set to test the key 1.1374 Fibonacci level, a 50% retrace of the 1.1570 to 1.1177 2018 slide, after spot registered the biggest one-week rise since November 2018. We are looking to get long on dips to 1.1310.

Traders are focused on the Federal Reserve, which kicked off its two-day policy meeting on Tuesday, for clues about the likely path of U.S. borrowing costs and whether the central bank will affirm its commitment to “patient” monetary policy.

Investors will particularly look to see whether policymakers have sufficiently lowered their interest rate forecasts to more closely align their “dot plot”, a diagram showing individual policymakers’ rate views for the next three years, analysts said.

Also expected is more detail on a plan to stop cutting the Fed's holdings of nearly USD 3.8 trillion in bonds.

New orders for U.S.-made goods rose less than expected in January and shipments fell for a fourth straight month, offering more evidence of a slowdown in manufacturing activity.

Factory goods orders edged up 0.1%, held back by decreases in orders for computers and electronic products, after rising by the same margin in December. There were also declines in demand for primary metals and fabricated metal products.

The market had forecast factory orders rising 0.3% in January. Factory orders increased 3.8% compared to January 2018.

Shipments of factory goods fell 0.4% after dropping 0.2% in December. They have now declined for four consecutive months, the longest streak since mid-2015.

Factory orders are likely to remain soft as unfilled orders rose only 0.1% in January after dropping for three straight months. Stocks at manufacturers jumped 0.5% in January after edging up 0.1% in the prior month.

The release of the report was delayed by a 35-day partial shutdown of the federal government that ended on January 25. U.S. financial markets were little moved by the data.

Reports last Friday showed manufacturing output fell for a second straight month in February and factory activity in New York state hit nearly a two-year low this month.

Manufacturing is losing momentum as the stimulus from last year's USD 1.5 trillion tax cut package fades. Activity is also being hampered by a trade war between the United States and China as well as by last year's surge in the dollar and softening global economic growth, which are hurting exports.

The Commerce Department also said January orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans on equipment, rose 0.8% as reported last week. Orders for these so-called core capital goods dropped 0.8% in December.

Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, also increased 0.8% in January as previously reported. Core capital goods shipments edged up 0.1% in December.

Bull sentiment is increasing. A new short-term high is set, daily RSI is rising and a long legged doji forms on the monthly candle. We have closed our previous position and placed a bid at 1.1310.

The European Central Bank pushed out the timing of its first post-crisis rate hike until 2020 at the earliest and offered banks new rounds of multi-year loans in a bid to revive the currency bloc's slowing economy, it said on Thursday.

The bolder-than-expected move showed ECB was having to revisit plans to dial back its unprecedented stimulus measures as a global trade war, Brexit uncertainty and simmering debt concerns in Italy take their toll on a fragile euro zone.

While investors had long stopped pricing in an ECB rate hike this year, few were expecting the bank to change its policy message, causing yields on government bonds and the euro to fall after the announcement.

"The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary," the ECB said in a statement. It had previously said rates would remain at their record low levels through the summer.

In addition, the ECB launched a third Targeted Long-Term Refinancing Operation consisting of two-year loans partly aimed at helping banks roll over 720 billion EUR in existing TLTRO and avoid a credit squeeze that could exacerbate the current economic slowdown.

Commercial banks have indeed already started restricting credit in the face of falling industrial output and exports, threatening to reinforce the slowdown.

Thursday's announcement comes four years to the month since the ECB launched an unprecedented asset purchase program known as quantitative easing (QE) to prevent sub-zero inflation from further hitting an economy still reeling from the euro zone debt crisis.

The ECB's move to extend the horizon for steady rates was likely to be perceived as a policy reversal for the central bank that only ended its bond-buying programme in December and has signalled an interest rate hike for later this year.

EUR/USD has plunged below the 1.1278 Fibonacci level, a 76.8% retrace of the 1.1234 to 1.1420 (February to March) up-leg, a daily close will confirm the shift in risk to the downside. That would increase the scope for a dive through the 1.1216 November 12 2018 low. We have placed an offer at 1.1300, upside should be capped by the falling tenkan line at 1.1333.

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