- EUR/USD witnesses selling for the third day in a row and falls to a three-week low.
- Expectations of an aggressive Fed rate hike and risk aversion sentiment benefit the dollar and put pressure on the pair.
- The lack of signs of a 50 basis point ECB rate hike in September weighs on the common currency.
The pair EUR/USD extends last week’s bearish momentum after ECB below 1.0650 support zone and remains under some selling pressure for third day in a row on Monday. The bearish movement has dragged the pair below the psychological level of 1.0500, to a low of three and a half weeksduring the first hour of the European session, and was supported by the broad strength of the US dollar.
US inflation data released on Friday raised expectations that the Federal Reserve will be more aggressive to cool price pressures. In fact, markets are now pricing in some 215 basis points of cumulative gains in 2022 and Fed Funds futures reflect an increase in probabilities of a rate hike of 75 basis points for July. This, in turn, pushed the benchmark 10-year US government bond yield to its highest level since May 9. In addition, the 2-year Treasury bond – considered a proxy for the Federal Reserve’s official interest rate – rose to 3% for the first time since 2008, helping to strengthen the USD.
The prospects of more aggressive action by the main central banks to curb inflation, together with a new warning about COVID-19 in China, added to concerns about the worsening global economic outlook. On Saturday, China claimed that its capital Beijing is experiencing an “explosive” outbreak of COVID-19. This comes after a mini-shutdown in Shanghai – China’s biggest city and world financial center – and took its toll on global risk sentiment. The risk aversion monetary flow was evident in the equity markets, which further benefited the US dollar as a safe haven..
On the other hand, the common currency came under further pressure from the European Central Bank’s conditional outlook for a large rate hike in September. In fact, The ECB did not specify the size of the rate hike, saying it would depend on inflation forecasts at that time.. Apart from this, the drop could be attributed to some technical selling below the 1.0500 level. Acceptance below that level could have set the stage for further losses amid the absence of market-relevant economic releases from either the Eurozone or the US.
EUR/USD technical levels
Source: Fx Street
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