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Jul 15 - 04:55 PM

EUR/USD - COMMENT-US Recap: Battered EUR/USD Bounces As Fed Hikes Repriced

By Randolph Donney  —  Jul 15 - 02:50 PM

The dollar fell on Friday, retreating from this week's two-decade highs as retail sales and consumer confidence data failed to build market consensus around the possibility of a massive 100bp hike at the Fed's July 27 meeting.

EUR/USD rebounded to the doorstep of 1.0100 after escaping a sub-parity close on Thursday and withstanding stronger-than-forecast U.S. retail sales nL1N2YW0ZO, which failed to keep Fed rate-hike bets at the heights achieved following Wednesday's unexpectedly strong CPI.

Unexpectedly weak U.S. industrial production nAQN1B7WLB and retreating University of Michigan consumer inflation expectations nN9N2WB01D weighed on Treasury yields, softening the dollar.

Fed officials signaled a 75bp hike this month nL1N2YW1AY rather than 100bp, which markets see as only a 40% probability, and traders are awaiting the July 21 ECB meeting, expected to deliver an inaugural 25bp rate increase and plan for euro zone fragmentation risk.

Widening 10-year bund-BTP yield spreads remained in focus due to Italian political risk nL1N2YW0PT, as did dwindling Russian natural gas supplies and the July 21 end of Nord Stream 1's maintenance closure. nL8N2YV2VT.

China's bigger-than-forecast Q2 GDP drop nL1N2YW02X cast further clouds over global growth expectations as the country's COVID restrictions and property sector problems weigh nL1N2YW07N.

EUR/USD gained 0.6%, trading entirely above the lower 30-day Bolli band for the first time since July 4, with the 10-day moving average now at 1.0146 if offers at 1.0100 are cleared and Thursday's bullish candlestick pattern presages a short-squeeze, or at least a more sizeable correction nL1N2YW1D8.

Support in the broader dollar index is at 107.92 and 107.04, the 23.6% and 38.2% Fibos of the post-June Fed meeting rally nL1N2YW1KN.

USD/JPY fell 0.3%, with a drag from broader long dollar profit-taking mitigated somewhat by Friday's risk-on flows sapping haven demand from the yen as well.

USD/JPY was weighed down by a second daily slip in 2-year Treasury-JGB yield spreads from Wednesday's post-U.S.
CPI driven peak.
Unlike the ECB that is at least going to begin taking its policy rate positive in H2, there's still no indication the BOJ will abandon its ultra-easy policies this year.

Thus pullbacks in USD/JPY still look like buying opportunities and long-term technical resistance by 140 achievable nL1N2YW1G0.

Sterling was up 0.3%, trailing EUR/USD's bounce, as EUR/GBP rebounded further from Wednesday's trend lows, and aided by rising two-year gilt-Treasury yield spreads from Wednesday's lows as investors still saw a good chance of the BoE stepping up to a 50bp hike in August.

But BoE rate hikes are still seen peaking about 50bp below the Fed's, thus the burden of proof remains on sterling bulls nL1N2YW17N.

Aussie and Canadian dollars gained about 0.6% apiece with the broader USD correction.

Bitcoin and ether managed modest gains in line with risk-on flows.

Housing data dominate next week's U.S. calendar before global PMI data Friday.
Investors will scrutinize Thursday's ECB meeting results, particularly details of its anti-fragmentation plan.
The BOJ also meet Thursday, but no policy change is expected.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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