Find feet above 1.1825 if dollar dust sets in
– EUR / USD appears to stabilize after Fed raises US yields
– Find foot above 1.1825 if dust settles above USD
– Fed speaks, US yields key to calm week for euro data
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- Reference rate EUR / USD at publication:
- Location: 1,1867
- Bank transfers (indicative guide): 1.1450-1.1535
- Specialist money transfer rate (indicative): 1.1760-1.1784
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The Euro-dollar exchange rate is entering a thicket of noteworthy technical support levels, which could allow the single currency to stabilize at or above the 1.1825 level over the next few days after suffering its last week. bloodiest since March 2020.
The single European currency signed a tripling of weekly declines last Friday when it confirmed a -2.08% drop for the five-day period and its biggest drop since the last week of March last year.
This was after the announcement made last Wednesday by the Federal Reserve (Fed) included a dot-plot of policymakers’ projections for the Fed Funds interest rate range, showing that a majority of the eighteen Federal Free Market Committee Rate Fixers (FOMC) now see themselves as likely to vote up to two interest rate hikes before the end of 2023; with the first one coming next year.
“While we weren’t expecting such a large move in the USD this week, our EUR / USD forecast is against consensus and we anticipate a stronger dollar this summer. Given the possibility of a partial retracement of the USD movement, we are keeping our previous forecast of 1.20 on a 1-month view for now, followed by a movement of 1.17 on a 6-month view, ”said Jane Foley, Head of FX strategy at Rabobank.
“We will review these forecasts over the next week or so when the initial impetus from the Fed meeting subsides,” Foley adds.
Much of the immediate outlook now hinges on U.S. government bond yields and how they react to a series of impending statements from Federal Reserve Chairman Jerome Powell and other Fed officials.
Above: Euro to dollar overnight rate with Fibonacci retracements of the April rally and major moving averages.
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“The Dots moved hiking forward. Their inflation forecasts signaled upside risks after base effects. Powell’s tone in particular was very positive, acknowledging the risks of inflation and repeating on several occasions that he expected a “very, very” big improvement in the labor market, “said Athanasios Vamvakidis, head of the labor market. foreign exchange strategy at BofA Global Research, who, along with his colleagues, remained a staunch bear of the euro-dollar in 2021.
“While we remain constructive on the post-FOMC USD, we also call for caution as we still see too many moving parts. We don’t expect the USD’s path to be smooth,” writes Vamvakidis, in anticipation of a Euro-dollar finish around 1.15 for this year.
Despite the obvious improvement in the dollar’s medium-term outlook, there are also a number of technical reasons why the Euro-dollar rate could recover at least temporarily over the next few days.
The European single currency closed quickly on Friday on the 78.6% Fibonacci retracement of its April rally located around 1.1825, which is an area that could break its fall this week, while on the weekly chart, the single currency was testing its 55-week movement. -average.
EUR / USD Forecast 2021
Period: Q2 2021
FX Guide for Businesses
Further down on the weekly chart (below), there is a significant and proven 38.2% Fibonacci retracement level of the euro’s overall rally from the March 2020 lows around 1, 1700.
“The FOMC statement triggered a widening of US-euro credit spreads and accelerated the unwinding of euro long positions. The breakout of key technical levels in quick succession culminated in a dip below 1.19. This could open a return to 1.17 this summer if strong incoming US data pushes the policy debate on reduction forward at the next FOMC meeting in July, ”said Kenneth Broux, strategist at Societe Generale.
In addition, there is another positive factor for the euro in the form of the starting level of the all-important two-year US government bond yield over which the Fed has tight control.
Movements here impact all currencies, but especially those offering lower interest rates and associated bond yields like the Euro, Japanese Yen, and Swiss Franc.
Above: Euro-dollar rate at weekly intervals with Fibonacci retracements of the 2020 rally and the 55-week moving average.
“Movements at the shorter end of the US yield curve are positive for the dollar, especially against low yielding countries. The timing of US data is light in the coming week, but there are multiple Federal Reserve speakers each day. The highlight could be Fed Chairman Powell’s testimony to Congress on Tuesday, ”said Chris Turner, global head of markets and regional head of EMEA research at ING.
The two-year yield hit 0.25% on Friday and the very top of the current Fed Funds rate range of 0% to 0.25%, but as President Jerome Powell himself downplayed the importance of the Fed’s dot-plot as a predictor. interest rates last Wednesday, it is very unlikely that it will rise much further in the very short term, as the Fed has somewhat inverted itself to insure the same.
As a result, and especially if President Powell’s congressional appearance on Tuesday makes the forex market question whether a 2022 interest rate hike really became more likely last week, the euro could see its fall. interrupted and itself amortized by the fall in bonds. yields and calmer conditions in US exchange rates at least until the start of the coming week.
“The price action has all the hallmarks of a sharp short positional adjustment – suggesting that most of the correction may have taken place. Still, we think the Fed’s rhetoric could see EUR / USD correcting a little lower this week. Watch for speeches by ECB President Christine Lagarde and board member Isabel Schnabel – likely to echo chief economist Philip Lane’s remarks, keeping the central bank away from early hawkishness, ”Turner adds. ‘ING.
Above: Euro-dollar rate shown at daily intervals with the yield on 02-year US bonds.