EUR/USD Treads Water Ahead of the Fed Minutes
EUR/USD Analysis
Markets prepare for today's minutes of the Fed's last policy meeting, when it had downshifted to a 25 basis points hike. We already know that two non-voting members (Ms Mester and Mr Bullard) saw a case for a bigger move in that meting [1], [2], so it will be interesting to see how this is reflected in the accounts and if there was more support for this.
Markets went into the new year, not believing that the Fed would raise rates by as much as its projections suggest, but following the blowout jobs report at the start of the month they started to come to grips with that. Persistent hawkish commentary since then, along with higher than expected inflation figures and yesterday's strong preliminary PMIs, support the higher-for-longer narrative.
At the time for writing, CME's Fed WatchTool assigns the highest probability to a terminal rate of 5.5%, which suggest another 75 basis points worth of hikes. [3]
This repricing has boosted the USDOLLAR and has narrowed the policy differential between the US central bank and its European counterpart, to the detriment of EUR/USD. Even so, the ECB has already out-hawked the Fed, looking set to raise rate more this year, compare to its peer.
European policy makers have been very hawkish and in one of the most recent comments, Mr Rehn told BorsenZeitung that rate increases beyond March "seem likely" and assumes that the terminal rate will be reached "in the course of the summer". [4]
EUR/USD loses around 2% this month due the heightened expectations around the Fed's policy path, breaching again today the 23.6% Fibonacci of the rebound from September's multi-year lows. This creates risk for further slide towards the 38.2% level (0.0451), although it is hard to justify further and sustained weakness below the ascending trendline from that low (1.0320-10) based on the monetary policy environment.
On the other hand, the common currency shows resilience and the correction is limited so far. As such, it has not lost the ability to reassert its power with a move towards the 1.0800 region, but will need catalyst and 1.1067 is distant.
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.
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