EUR/USD Supported Ahead of the Fed & Market Bets for a Large Rate Hike

  • EURUSD
    (${instrument.percentChange}%)

EUR/USD Analysis

The European Central bank had announced a detailed rate hike path last Thursday, to begin in July with 25 basis points and continue with potentially larger moves in September and beyond, but the Eurodollar had ended the day lower.

That may have constituted an important hawkish pivot, but the ECB it is still behind its major counterparts in policy normalization. The US Fed has laid out a well-telegraphed plan to deliver 50 basis point rate increases today an in July. Back in May, Mr Powell had taken off the table larger 75 basis point moves, as "not something the Committee is actively considering".[1]

However, Friday's new surge in Inflation to 8.6% y/y in May and the highest level since December 1981, caused an aggressive repricing in market bets for the Fed's next rate moves. CME's FedWatch Tool now projects larger 75 basis point hikes today and in July, with 98.1% and 90.6% respective probabilities at the time of writing. [2]

We have also seen high profile investors calling for aggressive action from the Fed, such as Mr Bill Ackman who said that "market confidence can be restored" with 75 bps hikes today and next month, before adding that "100 bps tomorrow, in July and thereafter would be better". [3]

The inflation surge and the ensuing calls for aggressive action to tame it, definitely put pressure on the Fed to break from its well-telegraphed intentions, but there is also the risk of looking like it is in panic-mode, if it follows the will of the markets.

These developments set a tricky backdrop and create risk for increased volatility from today's Fed policy announcement, warranting caution. Markets will have a lot to unpack, since apart from the rate decision, statement and press conference, we also expect the updated staff projection and the dot-plot with officials' view on the rate path.

Trade the News: View our Economic Calendar

In another complication, the European Central Bank will hold an unscheduled meeting today to discuss markets conditions, as reported by Reuters earlier, in a backdrop of bond market rout. [4]

EUR/USD jumped on the news, but the outlook has not changed much and the next leg of the move will be determined by today's Fed outcome, which has the potential to produce outsized moves.

From a technical prospective, recent rejection of the 38.2% Fibonacci of the 2022 High/Low drop has created risk for a test of the 2017 multiyear-low (1.0339) and would likely lead to talk of parity, although this has a high degree of difficulty.

On the other hand, EUR/USD managed to contain its three-day decline on Tuesday and reacted positively on the news of the unscheduled ECB meeting, although we struggle to see how an alarmed ECB can be a source of strength.

The upside looks unhospitable, since the EMA200 and the thick daily Ichimoku Cloud (from around 1.0600 and above) will require a strong catalyst to give way and the policy differential remains unfavorable.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 15 Jun 2022 https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220504.pdf

2

Retrieved 15 Jun 2022 https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html#

3

Retrieved 15 Jun 2022 https://twitter.com/BillAckman/status/1536797658819477507

4

Retrieved 03 Jul 2022 https://www.reuters.com/markets/europe/ecb-hold-unscheduled-meeting-discuss-market-rout-2022-06-15/

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.

Risk Warning: Our service includes products that are traded on margin and carry a risk of losses exceeding deposited funds, if you are a professional client. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}