EUR/USD is prolonging its decline at the beginning of the week, slipping back to the 1.1170/60 band following auspicious results from US inflation figures and against the backdrop of broad-based USD buying.
Yields in German Bunds are navigating a ‘sea of green’ so far, while US money markets are showing negative performance from yields (returning from earlier highs), narrowing the spread differential and somewhat limiting EUR’s drop.
Volatility has climbed to daily highs, adding further support to the common currency. However, the current strength of the greenback, measured by the US Dollar Index, appears to be the exclusive catalyst for the pair’s pullback to fresh 2-week lows, all following recent hawkish Fedspeak and rates-hike-supportive speech by Chair Yellen at the Jackson Hole Symposium.
According to CME Group’s FedWatch tool, the probability of a rate hike next month is now at 33% (vs. around 3% a week ago) and nearly 45% when comes to a December hike.
That said, and with a September hike still on the cards, the pair’s next stop could well be the area of 1.1120, where currently sits the key 200-day sma. The negative view on the pair seems to persist as long as August’s peak near 1.1370 keeps capping.
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