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May 03 - 04:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Flat As Market Awaits Fed

By Paul Spirgel  —  May 03 - 03:15 PM

The dollar index traded flat late in the U.S. session on Tuesday, erasing earlier losses after falling to session lows by 103.02 as markets pruned positions and readjusted in the final day of awaiting a widely expected 50 bps rate hike and balance sheet reduction from the Fed.

The dollar initially came under pressure after the RBA surprised markets with a larger-than-expected 25bp hike, encouraging reduction of longs following a 19-year high in the index last week.

The RBA move came even after it had said last month that it wanted to wait for both inflation and wage data before rates lift-off.
The RBA also said it would no longer reinvest proceeds from bond holdings, allowing its balance sheet to decline.

AUD/USD rallied, helped by hawkish guidance, to 0.7148 in Asia trading before relinquishing much of its gains.
It was last up 0.48% at 0.7086 by late U.S. trade.

Markets have fully priced in a 50bp Fed hike on Wednesday, according to Eikon’s FEDWATCH page, and assign an 8% chance to a 75bp increase, keeping a floor under the U.S. currency, which remains near recent trend highs.

EUR/USD rallied 0.1% to 1.0520, with traders reducing dollar longs in case the Fed delivers a dovish surprise of some sort on Wednesday.

Recent weak US GDP data and China manufacturing slowdown has some dialing back hawkish Fed expectations.

USD/JPY traded near flat, though recent dollar weakness versus the yen is likely to abate as the BoJ and Fed occupy opposite ends of the rate normalization spectrum.

The BoJ has pledged significant accommodation in order to jumpstart the moribund Japanese economy.
USD/JPY resistance at the 20-year high by 131.25 is likely to be targeted after the Fed hike, assuming U.S. payroll data on Friday does not disappoint.

GBP/USD was ending Tuesday trading down 0.1% at 1.2482, reversing early RBA-assisted gains to 1.2567 as diverging Fed-BoE rate outlooks remained a hindrance to cable gains.

Sterling bulls need the BoE to take a page from the RBA and surprise with an unexpectedly hawkish rate move.
Otherwise, GBP/USD is likely to test the recent 2022 and 21-month low at 1.2412.
A move below 1.2412 would put the July 2020 low at 1.2252 in focus.

Cryptos were a touch weaker.
BTC was down 2% at $37.7k, ETH down 2.2% at $2,792.
BTC support was holding for now above the Feb 4 low at $37k.

For more click on FXBUZ

Source:
Refinitiv IFR Research/Market Commentary

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