- EUR/USD has fallen to 1.0450 as the dollar benefits from safe-haven calls and aggressive bets from the Fed.
- Some point to a test of the mid-1.0300 yearly lows in an increasingly bearish context.
- The main event of the week will be the Fed meeting on Wednesday, in addition to the US CPI and retail sales data.
Although ECB policy makers remain supportive of the interest rate guidance, which was introduced by President Christine Lagarde following last week’s policy announcement, with markets betting on a 25 basis point rate hike next month, followed by a 50 basis point move in September, euro bulls are nowhere to be seen. In fact, the EUR/USD fell again on Monday to its lowest levels since May 17, just above 1.0450, with a further drop of 0.6% on the day, after falls of close to 1.0% last Thursday and Friday.
The drop in EUR/USD in recent days is due to the strength of the dollar, which has benefited from a combination of markets increasing the Fed’s tightening bets and pushing US bond yields higher, while as risky assets crumble, spurring demand for the world’s reserve currency as a haven. As for the former, 10-year US bond yields soared Monday to new multi-year highs above 3.25%, buoyed by bets by market participants that the Federal Reserve might even opt for a rate hike of 75 or 100 basis points on the back of last Friday’s US inflation data, which beat expectations.
Traders will recall that last Friday’s data revealed that the US annual headline inflation rate according to the Consumer Price Index (CPI) had risen to 8.6%, a new four-decade high. Meanwhile, data released by the University of Michigan later showed that consumer sentiment was at an all-time low (dating back to the 1970s) in June, prompting talk that the US economy may be already in recession or, at least, heading for it imminently.
With high and rising US inflation preventing the Federal Reserve from easing to support growth (for the time being), the dollar is able to garner safe-haven demand as a result of growth fears. The US Geopolitical headlines have also been in the spotlight over the weekend, with China appearing willing to start a war against Taiwan if it declares independence and Russia appearing to be gaining more ground in Ukraine. Meanwhile, Covid-19 infections in Beijing are on the rise again as city authorities launch new rounds of mass testing, highlighting the risk of a lockdown in China.
This week’s US data (retail sales for May and producer price inflation, plus the Philadelphia Fed manufacturing index for June) is likely to reinforce the fact that the economy looks increasingly stagnant, while that the main state event will, of course, be the Fed’s policy announcement on Wednesday. The only major data out of the Eurozone will be the German ZEW figures for May on Tuesday. In the current macro environment of risk flows and an increasingly aggressive Federal Reserve, the Euro looks very likely to test previous yearly lows of 1.0350.
Technical levels
Source: Fx Street
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