- The EUR/USD price tested a new high as the strong rally started in March accelerated.
- The pair was reacting to the strong economic numbers from Europe.
- Traders are now focusing on the Federal Reserve rates decision.
The EUR/USD unstoppable rally gained steam after a stream of positive economic numbers from Europe ahead of the Fed interest rate decision. It is trading at 1.2190, which is 14.75% higher than the year-to-date low of 1.0635.
European economy rebounds
The biggest catalyst for the strong EUR/USD is the strong flash economic numbers from Europe. In a report released earlier today, IHS Markit said that the European manufacturing sector continued to do well in December.
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In total, the flash manufacturing PMI rose to 55.5 from the previous 53.8. That increase was better than the expected 53.0 and was spread across the region. For example, in Germany, the PMI rose to 58.6 while in France, it rose from 49.6 to 51.1. That happened even as European countries continued to put more measures to limit the transmission of the virus.
The important services sector also improved, with the overall PMI rising from 41.7 to 47.3. This reading was better than the expected 41.9 but is still below the expansionary zone of 50.0. That is partly because many service companies like those in tourism, bars, and hotels have been closed. In a statement, an analyst at Markit said:
“Companies have also become increasingly optimistic about the year ahead, with vaccine rollouts expected to help restore businesses to more normal trading conditions as 2021 progresses.”
Fed decision waited
The next big catalyst for the EUR/USD is the upcoming Fed interest rate decision that will come out at 19:00 GMT followed by a press conference at 19:30.
In general, analysts from major CFD trading brokers and financial firms believe that the Fed will leave its pandemic response tools unchanged. This means that it will leave interest rates at 0.0% and 0.25%. It will also continue implementing its open-ended quantitative easing policies.
Still, analysts will focus on the bank’s language in a bid to forecast what it will implement in the coming year. For example, will it link future rate increases to employment or inflation? Also, will it tweak the composition of its bond purchases. In a note to investors, Goldman Sachs analysts warned that the bank could “unlock a new bout of dollar weakness in fairly short order.”.
EUR/USD technical outlook
On the four-hour chart, we see that the EUR/USD has been in a strong upward rally. It rose to a multi-year high of 1.2210, which is still above the 25-day and 15-day SMA. It is also slightly above the ascending trendline that is shown in black. Therefore, it seems like bulls have the momentum, which will see them continue to push it higher in the near term.