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May 23 - 04:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Clears Key Hurdles As Safety Trade Retreats

By Randolph Donney  —  May 23 - 02:55 PM

The dollar and yen fell out of favor on Monday as risk aversion abated on hopes that markets had identified the peak in Fed rate hikes to be expected and Ukraine-war fallout appeared less damaging than feared for the euro zone's largest economy nL5N2XF1JC, while the ECB sent further tightening signals.

The dollar index and EUR/USD broke through the U.S. currency's uptrend lines, highlighting potential reversals, while market optimism grew that the worst of Chinese COVID lockdowns are past and increasing stimulus efforts nL2N2XC033 may reduce economic disruptions.

Profit-taking on dollar-positive risk-off trades produced buying of multi-asset dips, which may be enhanced by expected month-end rebalancing.

The drop in breakeven 5-year U.S. inflation pricing from March and April peaks at 3.58% and 3.52% to Friday's 2.9% suggests Fed tightening is starting to lower inflation expectations -- following this month's 50 bps rate hike -- though there's a long way to go to the Fed's 2% target for core PCE, due out Friday.

EUR/USD gained 1.28% and cleared the 30-day moving average, kijun, 2020's low and the May 5 post-FOMC rebound high at 1.0625-42.
The 50% Fibo of the 1.1185-1.0349 drop at 1.0767 may be in play nL2N2XF142.

Two-year bund-Treasury yield spreads have rebounded to their least negative since March 14, making May's EUR/USD lows, which failed to break crucial 2017 lows, look underpriced and the dollar index overpriced nL2N2XF1E7.

Sterling was up 0.7% and well above the pivotal 1.2500 resistance it faltered by last week.
The next hurdle is May's 1.26375 high, just beyond the kijun and 30-DMA that ended rebound attempts since late February.

Wednesday's Fed minutes are awaited for honing Fed tightening pricing, after the BoE grew a bit more cautious about its own rate-hike plans nL2N2XF147.

USD/JPY was flat and again held above key supports by 127 with help from a bounce in Treasury yields versus static JGB yields nL2N2XF14C.
The bounce in Treasury yields was in response to the broader recovery in riskier assets, which weakened demand for the haven yen and the dollar.

Key for the USD/JPY is further Fed hike pricing that doesn't trigger a flight to safety and another pullback in shorter-term Treasury yields.

USD/CNH fell 0.59% to its lowest since May 5, though more progress is needed in Chinese reopening and a return to negative 10-year Treasury-CGB yield spreads to put much more of this year's rally at risk.

Bitcoin and ether were little changed and most high-beta currencies rallied against the retreating dollar.

Tuesday features global PMIs for May, U.S. new home sales and remarks by Fed Chair Jerome Powell.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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