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Apr 14 - 04:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Near Two-Year Lows On Fresh ECB-Fed Divergence

By Randolph Donney  —  Apr 14 - 02:35 PM

The dollar index rose to two-year highs on Friday after the ECB appeared too worried about the effects of the Ukraine war to signal a quicker exit from emergency easing nL2N2WC0A7 while rebounding Treasury yields reflected markets' ongoing confidence in aggressive Fed tightening nL2N2WC12W.

Ebbing short-term Bund and EURIBOR yields encouraged weakness in EUR/USD, which fell to toward 2020's pandemic nadir after the ECB sounded less hawkish than markets expected.

Treasury yields recovered rapidly after retail sales nL2N2WC164, jobless claims, import/export prices and consumer sentiment nAQN0UQWPC, reversing a midweek swoon on short-covering and speculation the CPI data on Tuesday might have marked a peak that could stymie further Fed rate hike pricing.

There is some concern that an overly cautious ECB policy normalization will put more pressure on the Fed to tighten to make up for ongoing euro zone stimulus reinforcing global inflation.

EUR/USD was down 0.6% after bouncing from 1.0758, its lowest since April 2020, with help from a Reuters report from ECB sources that a July rate hike is still possible nS8N2UQ05X.

Post-ECB meeting H2 rate hike pricing was extremely volatile, but a July hike was never fully priced out, and rate hike pricing by year-end rebounded from roughly 45 bps to settle near 65 bps.

The Fed is priced to hike rates another 215 bps by year-end to 2.5%, leaving EUR/USD's tenacious spec longs in the hot seat and 2020's 1.0636 EBS trough in play nL2N2WC19H.

Sterling was down 0.3%, also succumbing to the surge in Treasury yields and fallout from EUR/USD's post-ECB slide nL2N2WC1DT.
The sell-off scuttled an attempt to post the first daily close above the 21- and 30-day moving averages since Feb.
23, the day before the Russian invasion of Ukraine began.

USD/JPY was up 0.25% and well off its early 125.095 EBS pullback low, but still below Wednesday's major Fibo-objective peak and nearly 20-year high at 126.32 nL2N2WC1MO.

Overbought pressures after reaching the Fibo target off 2021's pandemic base and the potential for more MOF jaw-boning to dissuade further gains are the main weights on USD/JPY, with the BOJ has yet to loosen its yield curve control policy.

A late surge in oil prices on an NYT report suggesting the EU may phase in a ban on Russian oil imports nL3N2WC338 helped trim USD/CAD's yield spread driven gains, and allowed AUD/USD to recover slightly as well.

Bitcoin and ether were down about 3% in line with weaker stocks and higher "risk-free" Treasury yields.

Friday features U.S. industrial production and empire state manufacturing.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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