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Nov 02 - 04:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Heavy As Fed Looms

By Randolph Donney  —  Nov 02 - 02:37 PM

The dollar index bounced off 10-day moving average support on Tuesday as Treasury yield spreads over Bund and JGB yields firmed ahead of Wednesday's Fed policy statement, which may remind markets that the U.S. has much greater scope for monetary tightening than the euro zone or Japan.

To continue its uptrend past major resistance soon, however, the dollar needs help from Fed Chair Jerome Powell by keeping post-tapering rate hikes on the 2022 agenda, thus supporting short to medium-term Treasury yield spreads over Bund and JGB yields.

Markets are pricing in two 25bp Fed hikes next year and in 2023 versus about one ECB hike in 2022.

If Friday's U.S. payrolls report shows job growth accelerating and the Fed says policy will remain flexible in the normalization process, that could allow markets to embrace policymakers' September median view of federal funds at 1% by end-2023 and 2.5% in the longer run nS0N2Q401C, underpinning the dollar.

The ECB pushed back against any rate hike pricing at last week's meeting, while the BOJ reaffirmed its pact with the Japanese government to continue its quest for 2% inflation.

EUR/USD fell 0.25% after Monday and Tuesday's rebound attempts found sellers by the tenkan and 10-DMA.
Friday's month-end spike up was rejected by the downtrend line from June.

The Australian dollar sank 1.3% after the RBA abandoned its yield curve control target but pushed back against market expectations of rate hikes coming relatively soon.
Still, the shift away from accommodation by the BOC, RBA and BOE may create more space for the Fed to tighten nL1N2RT16V.

GBP/USD fell 0.4%, partly in a sign the markets had too aggressively priced in BOE rate hikes ahead of Thursday's meeting.
A 15bp rate hike at the meeting is favored, with several more to follow next year, but there's been a little trimming of those expectations since Friday.

Sterling broke support at 1.3623, the 50% Fibo of the September-October rebound, following in the footsteps of AUD/USD's post-RBA slide, though that pair was also dragged down by plunging iron ore prices and Chinese economic worries nL1N2RT0HA.

Markets may see BOE policy being swayed by the outcome of the Fed meeting, which comes first nL1N2RT129.

USD/JPY fell 0.1% after rebounding well away from a failed attempt to break the rising 21-DMA by the 113.46 low on EBS.
Rising U.S. stocks and the BOJ's vow to stay in ultra-easy mode while pursuing its 2% inflation goal kept the primary uptrend intact pre-Fed.

A reasonably hawkish Fed and decent payrolls Friday may be needed to get USD/JPY past major hurdles nL1N2RT0U1.

Ether made a new record high, with a 3.9% gain, and bitcoin gained more than 4%, nearing October's record levels.

Aside from the Fed meeting conclusion Wednesday, ADP, ISM non-manufacturing and factory orders are on tap.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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