EUR/USD bounces from 1.2110 lows as risk appetite weighs on dollar

On the face of it, the fact that EUR/USD is set to finish a second consecutive session hardly changed suggests that not much happened on Tuesday. Taking a look at the chart shows that there was a little more action beneath the surface; during the Asia Pacific session and early European session, EUR/USD mostly went sideways, with $1.3B in option expiries for the NY cut sat between the 1.2175-80 mark acting as resistance. However, prior to the start of the US trading session things got a little more interesting when US bond yields suddenly caught a bid, pushing the pair as low as the 1.2110 mark. However, EUR/USD quickly rebounded and is now trading flat on the day again close to the 1.2150 mark, as a turn for the better in the market’s broad appetite for risk weighed on the US dollar.

Driving the day

One key focus of market attention on Wednesday was Fed speak. Fed Chair Jerome Powell appeared for the second day of his semi-annual Congressional testimony, whilst Fed Vice Chair Richard Clarida and influential FOMC member and permanent voter Lael Brainard spoke at the same event. All three seemed very much on the same wavelength and all stuck to the Fed’s usual dovish script; Fed members acknowledged recent improvements in the outlook for the US economy but emphasised that they will not be taking policy action based on forecasts alone and that they want to see the actual data improve decisively before acting. All three emphasised that the Fed remains a long way from its inflation and employment goals (something Powell has been particularly keen to stress), implying all three remain resolutely in support of ultra-accommodative policy for the foreseeable future.

Whilst the above-noted dovishness has certainly supported risk appetite, and likely contributed to EUR/USD’s bounce from lows, none of the three aforementioned Fed members expressed any concern about recent moves higher in US bond yields. This has been taken as a green light for US bond yields to move higher. Remember that earlier in the week ECB President Christine Lagarde took a very different approach from the Fed members and said that the ECB will be closely watching long-term bond yields (exerting downwards pressure across European government bond yields). This opens the possibility for a further widening in the US bond yield advantage over the Eurozone, which could be a bearish factor for EUR/USD.