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May 31 - 05:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Rebounds From Lows As Inflation Risks Cut Both Ways

By Randolph Donney  —  May 31 - 02:50 PM

The dollar rose on Monday but retreated from its highs as an early safe-haven bid on soaring energy prices and hawkish Fed talk nW1N2WO004 eroded in the face of firming ECB rate-hike expectations following record-high euro zone inflation nL8N2XM3LJ.

An EU agreement to end most Russian oil imports nL8N2XN1YN while Moscow widens gas cuts to Europe nL1N2XN0EU contributed to energy prices, which were further boosted by the removal of Shanghai lockdowns on June 1 nL4N2XN0K8 and more detailed stimulus plans for China nL1N2XN05WnL2N2X8047.

Brent and WTI traded at their highest since early March, when markets were in the initial throes of the Ukraine invasion.

EUR/USD was down 0.4%, well off the 1.0679 low, but also well down from the 1.0777 EBS high as the dollar's risk-off appeal ran into EUR/USD dip-buyers eying 2-year bund-Treasury yields trading nearly 10bp higher than Friday's close.

Monday's EUR/USD recovery high at 1.0787 perfectly retraced 23.6% of the February-May dive.
EUR/USD's recovery from five-year lows will persist if the trend of narrowing medium-term ECB-Fed rate hike pricing persists through the onslaught of key U.S. data this week and as pressure builds to address euro zone inflation nL1N2XN1GE.

USD/JPY gained 0.76% in the absence of any BOJ tightening prospects and on rising energy prices USD/JPY is positively correlated with, given Japan's dependence on foreign energy supplies.

Prices ran into resistance by 128.86, the daily kijun and 50% Fibo of the ABC correction from May's 20-year peak to last week's 126.37 trough on EBS.
A close above 128.86, perhaps after further Treasury yields support from key U.S. data and Fed events into the new month and week's end, would improve the prospects of May's highs being retested nL1N2XN17N.

Sterling fell 0.3%, recouping some of its earlier losses, in line with the bounce in 2-year gilt-Treasury yields spreads from Friday's close.
A weekly close above the weekly tenkan at 1.2662 is needed to give the upward correction fresh legs.

The Australian and Canadian dollars gained 0.22% and 0.1% respectively, with China reopening hopes, surging oil prices and a 50bp rate hike expected from the BOC on Wednesday helping those currencies.

The dollar was mostly firmer versus higher beta currencies due to the nearly 10bp rise in 10-year Treasury yields.

Bitcoin was about flat and ether down modestly after big risk-on rebounds on Monday.

Wednesday has ECB President Christine Lagarde and seeveral Fed speakers, as well as ISM manufacturing, JOLTs and the beige book releases ahead of Friday's employment report and ISM non-manufacturing.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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