EUR/USD rose slightly on Monday as it consolidated the previous session's sharp losses, but longs were still confronting risks that the Fed could hint at less accommodation at this week's meeting.
Since the April 28 meeting, when it said it was too early to shift policy nL1N2MK0XO, the dollar has trended lower as investors bought into the Fed's transitory inflation rhetoric.
10-year yields US10YT=RR dropped from 1.62% as low as 1.428% during that time, December 2022 eurodollar EDZ2 rallied from the 99.55 area to test resistance at 99.665 and the dollar index =USD fell from 99.56 to 89.59 before bouncing slightly.
But U.S. inflation has accelerated faster than expected nL1N2MZ15UnL2N2NR2Q5, while the jobs has recovered, though more slowly than forecast.
For the market, those data points represent a risk that Fed rhetoric could shift toward less accommodation and earlier tapering than previously anticipated.
If investors perceive such a shift in the Fed statement or news conference, EUR/USD could come under downward pressure as U.S. rates and the dollar firm, raising the risk of testing of 1.1986/92, where the May 5 daily low and 200-DMA sit.
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