- EUR/USD came under renewed selling pressure on Friday amid resurgence in USD demand.
- The Fed’s aggressive stance supported the dollar, although a combination of factors capped gains.
- The ECB rate hike signal could support the euro and limit the pair’s losses.
The EUR/USD pair extended the previous day’s rejection from the 1.0600 level, weekly high, and saw some selling on the last day of the week. The bearish trajectory was extended at the beginning of the North American session.
On Friday, the dollar rose strongly again and recovered part of the losses registered after the FOMC in the last two sessions, amid the expectations of the Fed. The markets seem convinced that the US central bank will continue to tighten its monetary policy at a faster pace to combat persistent inflation. Bets were bolstered by the Fed’s so-called dot plot showing the median projection for the fed funds rate at 3.4% in 2022 and 3.8% in 2023. This helped revive demand for the USD, which, in turn, was seen as a key factor putting downward pressure on the EUR/USD pair.
That said, a combination of factors could slow dollar bulls from their aggressive bets and help limit any deeper EUR/USD losses, at least for now. However, investors took comfort in the fact that the Fed predicted that the interest rate would drop to 3.4% in 2024 and 2.5% in the long term. This was highlighted by the current decline in US Treasury yields, which, coupled with the risk boost, could act as a safe haven dollar headwind. The shared currency could also be supported by the explicit signal from the European Central Bank that it will raise interest rates in July for the first time since 2011.
This mixed backdrop warrants some caution before positioning for a firm short-term direction ahead of a prolonged US weekend. It will therefore be prudent to wait for some follow-on selling before confirming that the recent rebound from close to the yearly low has run its course and placing further bearish bets.
Technical levels
Source: Fx Street
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