EUR/USD: choppy on Yellen - is she being hawkish or dovish?
|Currently, EUR/USD is trading at 1.1794, down -0.45% on the day, having posted a daily high at 1.1862 and low at 1.1757.
EUR/USD made fresh lows when Yellen and Fed's Bostic were speaking on relatively centralist comments. At first, the market looked into them for anything hawkish that could be taken from the comments and EUR/USD dipped to aforementioned lows. However, when all were fully digested, the dollar was then sold off again on the not so hawkish tone. Essentially, Yellen is telling the market that the Fed will hike rates so long as inflation picks up and she expects it to do so - however, the market is not convinced that she is right.
- Gradual approach to hikes particularly appropriate in light of subdued inflation, low neutral rate
- Imprudent to leave rates on hold until inflation reaches 2%
- Can still achieve 2% target goal even if fed is underestimating slack or overestimating inflation expectations
- Low inflation likely due to transitory factors, sees many uncertainties
- Downward pressure on inflation could prove unexpectedly persistent
- Considerable' odds that inflation won't stabilize at 2% over next few years
- Risk that inflation expectations are not as well-anchored as they appear
- Data suggests labour mkt is healthy, without substantial slack & not overheated
- Evidence on labour mkt not definitive, says Fed must be 'open-minded'
Fed's Bostic: Open minded about December rate increase
EUR/USD levels
Analysts at Commerzbank explained that EUR/USD has finally eroded the 5 month uptrend at 1.1875. "The upmove is starting to weaken. The close below the five month uptrend line has negated the up move and should trigger losses initially to the 1.1662 August low and below here will target the mid-June high at 1.1296 and the more important 1.1110 end of May low. Intraday rallies should struggle circa 1.1927, the 20-day ma," the analysts argued.
However, analysts at Rabobank, although cautious of the recent break below key support, have said that it has been their view that EUR/USD would consolidate in the 1.1900 area near-term before pushing towards the 1.22 level on a 6 mth view. "We haven’t yet changed this medium-term target given that the current bout of position adjustment was arguably overdue. That said, the souring of political sentiment in EUR does pose a significant risk to this forecast."
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