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May 20 - 05:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Soften As Rates Help Dollar

By Randolph Donney  —  May 20 - 02:25 PM

USD index rose 0.06% by New York afternoon trade, helped by a slight rise in long-end U.S. Treasury yields that facilitated a widening in U.S.-Japan rate differentials, which contributed to a rally in USD/JPY back above 156.

The dollar was trading close to sideways against the EUR and GBP as traders await UK CPI and Fed minutes from the April 30-May 1 meeting on Wednesday.

A bevy of Fed speakers attracted the most attention, including Fed Vice Chair Philip Jefferson, Vice Chair Michael Barr for supervision and Atlanta Fed President Raphael Bostic, who uniformly indicated the fight against U.S. inflation is ongoing amid the current restrictive policy.

Though the comments were tipped slightly less dovish, the bulk of the comments were old news and held little sway over FX direction.

EUR/USD was trading -0.02% at 1.0865.
With the ECB expected to cut rates in June, further gains may be hard to come by unless the Fed shifts to a more dovish policy.

Currently LSEG’s IRPR page indicates the ECB is expected to cut in June and with a total of 66bp on the way in 2024 -- far more dovish than the Fed, which markets see inaugurating an easing cycle in September and delivering a scant 40bp reduction by year-end.

USD/JPY was trading at 156.16.
Technically, a close above 156 is likely to stir further bullish tones.
With Fed members keeping to a steady rate tack in the near-term, and the BoJ not likely to begin hiking soon, wider U.S.-Japan rate differential is likely to keep USD/JPY bid, barring further yen intervention talk.

GBP/USD rallied to a 2-month high at 1.2726.
The pound's rise was likely due to more short covering ahead of Wednesday’s UK CPI release.

Sterling bulls were paying no heed to higher UST yields or the underlying dovish tone by the BoE, put in after the recent dovish hold by the MPC.
A further move lower in UK inflation may increase betting on a June rate cut as well as a second rate reduction in August.
A resurgence in dovish expectations would undermine the current bullish GBP tone and put April lows at 1.2299 and Oct 2023 lows at 1.2070 in sharper focus.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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