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The euro traded sharply higher against the U.S. dollar on the back of dovish FOMC minutes. In addition to expressing specific concerns about the global slowdown, policymakers also said the rising dollar may dampen inflation and pose a risk to exports and growth. This is the first time that we have heard the central bank single out the exchange rate as a source of concern and in doing so, they send the greenback sharply lower. Given the strong gains in the currency over the past few weeks, the dovish tone of the FOMC minutes could be enough to trigger a deeper correction in the dollar, leading to a stronger recovery for euro. Economic data from the Eurozone leaves a lot to be desired and tomorrow’s German trade report is expected to highlight the ongoing strains in the region’s largest economy. However, as we have seen all week, overstretched positions could overshadow data flow.
Having closed above the first standard deviation Bollinger Band, EUR/USD is now in “turn” mode. The latest rally should extend to 1.28, the 61.8% Fibonacci retracement of the 2012 to 2014 rally. A break above this level would open the door for a stronger move towards 1.30. If EUR/USD drops back below 1.26, new lows are likely.