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Jun 14 - 05:55 PM

EUR/USD - COMMENT-US Recap: Pre-Fed Jitters Prevail As EUR/USD Spies 2022/17 Lows

By Randolph Donney  —  Jun 14 - 03:25 PM

The dollar index rose to a 20-year peak on Tuesday, shedding earlier losses as Treasury yields rebounded to multi-year highs in the run-up to Wednesday's Fed rate decision, while resurgent risk aversion provided the U.S. currency added support.

Markets have shifted dramatically since Friday's report showing unexpectedly high inflation of 8.6%, bracing for a 75bps rate hike on Wednesday and at July's meeting compared with 50bps increments before.
Futures foresee half-point hikes from September through December, with rates peaking above 4% next year.

ECB rate hike expectation favor a 25bp kick-off in July, with 50bp hikes seen more likely from September through December with peak policy rates above 2.5% in the face of record 8.1% euro zone inflation, while the BOJ isn't expected to raise its -0.1% target rate this year.

EUR/USD again found support near 1.0400, but fell 0.07%.
An aggressive Fed move could lead to a test of this year's and 2017's lows at 1.0349/40 on EBS, with a clear break favoring a fall to parity, which options and technicals are reflecting nL1N2Y119X.

ECB board member Isabel Schnabel said there were no limits to the bank's commitment to fighting fragmentation of the euro zone bond market nL8N2Y15FU but that failed to prevent widening in peripheral yield spreads.

Sterling tumbled 1.6% against the dollar and 1.6% against the euro.
Cable hit its lowest since March 2020, the initial pandemic plunge month that plumbed 1.1413 and briefly breached 2016's Brexit breakdown low at 1.1491.

Markets doubt Thursday's BOE meeting will produce more than a 25bp hike, despite UK inflation at 9% and seen hitting double-digits this year.

Adding to its travails are weaker-than-forecast GDP, a surge in the April jobless rate to 4.2% from 3.5% nL8N2Y11L9, Northern Ireland Brexit trade angst and renewed Scottish independence plans nL1N2Y11JY.

USD/JPY gained 0.73% on the back of massive gains in 2-year Treasury-JGB yield spreads to highs not seen since 2002.

Prices cleared Monday's 135.22 peak by 2002's 135.20 high.

Above those 24-year highs there isn't much resistance until 1998's 147.63 peak nL1N2Y11K4.

Japanese officials have warned against the yen's rapid fall, but it would take signs inflation has peaked in the U.S. to turn the bullish USD/JPY tide.

Aussie and the Canadian dollar fell 1.05% and 0.5%, respectively, amid continued risk-reduction.

Bitcoin hit it lowest since Feb.
Ether hit its lowest since Dec.

Ahead of Wednesday's FOMC events, U.S. May retail sales, business inventories and NAHB data will be released, though they are unlikely to shift Fed or dollar expectations much given the high inflation backdrop.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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