EUR/USD hovers above 1.0400 pre-Fed despite weak US data, after ECB announcement fails to inspire bulls
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- EUR/USD is hovering above 1.0400 after the ECB failed to give it a boost and despite weak US data.
- The upcoming Fed meeting, if more hawkish than expected, risks sending towards 2017 lows at 1.0340.
Despite very weak US Retail Sales figures for May (inflation-adjusted sales were down 1.3% MoM), EUR/USD has been under pressure in recent trade and is currently probing session lows in the 1.0400 area. Traders are attributing recent downside in the pair to euro weakness after the ECB announced that it would apply flexibility to its PEPP reinvestments to ease “fragmentation” in the transmission of monetary policy (essentially, to close yield spreads between Eurozone nations).
Seemingly, markets do not think the ECB went far enough in addressing fragmentation risk (German/Italian yield spreads jumped, for example) and this seems to have hurt the euro. With these two big catalysts (US data and the ECB) out of the way, attention has turned to the upcoming Fed meeting at 1800GMT and follow-up press conference with Fed Chair Jerome Powell.
The Fed is now expected to raise interest rates by 75 bps, though some are still calling for a 50 bps rate hike (as the Fed had been signalling prior to last week’s hot US inflation figures), while some are even calling for a 100 bps hike. There hasn’t been this much uncertainty about Fed interest rate policy for some time, meaning that the reaction in markets could be very volatile. Note that the Fed is also releasing new economic forecasts and a new dot plot.
If investors interpret the meeting outcome as more hawkish than expected, EUR/USD runs the risk of falling below its annual lows in the 1.0350 area. This could open the door to a run lower towards the 2017 lows at 1.0340 and then closer to parity.
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