EUR/USD pressured as US 10-year yield rises to 3% ahead of Fed

The euro is under pressure in the mid-day US session and is on the verge of a break of 1.05 the figure vs the greenback. Trading at 1.0507, EUR/USD is down some 0.32% and has drifted from a high of 1.0568 to a low of 1.0501 so far at the start of this week. 

The US dollar is climbing from the corrective lows as per the DXY index which measures the greenback vs. a basket of G10 currencies. The index is trading 0.4% higher at the time of writing at 103.64, below the 103.92 bull cycle highs scored towards the end of last month's trade and month-end rebalancing. 

The markets are getting prepared for the outcome of the Federal Open Market Committee meeting this week where the Federal Reserve is expected to hike rates 50 bp to 1.0% Wednesday. While there will be no new forecasts until the June 14-15 FOMC meeting, another 50 bp hike is widely expected then also. In fact, as analysts at Brown Brothers Harriman note, WIRP suggests nearly 50% odds of a 75 bp hike then. 

''Looking further out,'' the analysts said, ''the swaps market is now pricing in 300 bp of tightening over the next 12 months that would see the Fed Funds rate peak near 3.5%. Because of the media blackout, there are no Fed speakers until Chair Jerome Powell’s post-decision press conference Wednesday afternoon.''

The sentiment is being reflected through the yield on US Treasuries. The 10-year yield traded over the 3% milestone level today, the highest since December 2018. Similarly, the 2-year yield traded near 2.75% today, the highest since April 22 and nearing that day’s high near 2.78%. 

''This uptrend is likely to continue as US inflation runs hot and the Fed continues its aggressive tightening cycle Of note, the 2-year interest rate differentials are moving back in the dollar’s favour after a brief corrective phase last week. In particular, the spreads with Japan (276 bp) and the UK (112 bp) continue to make new cycle highs, while the spread with Germany (248 bp) is lagging a bit.  All three should continue to rise,'' analysts at BBH explained. 

The question with respect to the value of the EUR/USD is not so much if, but when will parity be seen, or, will the US dollar keep rising? 

Analysts at Westpac argue that there are factors that have scope to sustain ''further near term DXY upside.''

''Leading US activity indicators are edging lower, but the US offers a much more compelling growth story than Europe’s acute stagflationary picture and China’s Covid constrained growth story,'' the analysts said. ''The Fed is unlikely to shift tack until inflation is contained and risk appetite overall looks set to remain unsettled for some time to come.''

EUR/USD technical analysis

The weekly chart shows that the price is a strong bear trend which is meeting a critical level, 10490, that guards the June 2017 lows near 1.0450. Should the price reach these lows, then there would be prospects of a correction towards the 2020 lows and a 38.2% Fibo correction on the way to 1.0700.