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May 05 - 04:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Drops As Dollar Reverses Fed-Inspired Drubbing

By Paul Spirgel  —  May 05 - 03:15 PM

The dollar index rose on Thursday, recovering from its post-Fed drubbing when Chair Jerome Powell appeared to take 75bp rate hikes off the table, posting a 19-1/2-year high of 103.94, a pip above its previous peak.

The index was settling back at 103.86 into the NorAm close, while Eikon’s FEDWATCH was pricing in a 75% chance of a 75bp hike at the Fed’s June 15 meeting, contrary to Powell's suggestion.

The higher rate outlook lifted the dollar broadly versus developed and emerging markets currencies.

With Wednesday's Fed hike in the rear view mirror traders' focus has shifted to Friday’s payrolls data, with keen attention paid to wages and the unemployment rate.

Friday’s rise in the dollar index was helped by its largest component, EUR/USD, falling by more than 1% to 1.0510, hovering just above the 2022 low at 1.0470 put in on April 28.

The European Central Bank should hike its deposit rate in July by 0.25 percentage points, ECB policy maker Olli Rehn told a Finnish daily on Thursday, allowing it to get up to zero by autumn nL5N2WX7CH.

The comment still left the ECB policy outlook lagging far behind the Fed, weighing on EUR/USD.

Sterling led all currencies lower versus the USD, dropping 2.3% to 1.2345, after the BoE hiked 25bps, disappointing some bets on a more aggressive increase, as reflected on Eikon's BOEWATCH.

Further weighing on sterling, the BoE forecast inflation rising above 10% by Q4 2022 while highlighting potential UK recession risks, sending cable to lows not seen since July 2020.

USD/JPY was set to end NorAm +1% at 130.45.
With the BoJ sticking to its extraordinarily accommodative policy stance, USD/JPY is likely to trickle higher as U.S. and Japanese rates diverge.

USD/JPY finds resistance at 130.95, the April 29 high and 131.25, the April 28 2022 high.

The rising U.S. rate outlook hurt cryptocurrencies, sending bitcoin down 9%, ending NorAm at $36.2k, and ether -7.4% to $2,722.
A close below $37k would put the Feb. 24 BTC low at $34.3k in focus.

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Refinitiv IFR Research/Market Commentary


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