EUR/USD: Real rate differentials point to risks of a pull lower – TDS

The June ECB meeting was not a major directional catalyst for EUR/USD, as expected, with the higher US CPI reading likely exerting a stronger influence overall. Looking forward, economists at TD Securities expect market attention to shift quickly to next week’s FOMC meeting. Ahead of that, they retain our sell-on-rallies bias for the pair and see moderate downside risks for the near-term.

Momentum indicators favor a sell-rallies stance

“Looking forward, we do not expect the June Governing Council meeting to cast a very long shadow over the EUR. The end of the PEPP may be starting to come into view for some of its members, but this is still an issue for the future. The region's recovery still has to remain on track for several more months first. In the meantime, other central banks will not necessarily be sitting still.”

“We expect recent ranges to remain in place for EUR/USD as market attention pivots quickly to next week’s FOMC meeting. In particular, we remain inclined to fade rallies toward the recent range tops around the 1.2250 (+/-) mark.”

“We think EUR/USD will struggle to break to new highs for the cycle unless a fresh catalyst emerges. At this point, we would have to look for this to emerge from the USD leg, as the European event risks calendar quiets down for the summer.”

“We think the pair may begin to feel the pull lower from real yield differentials. Much will depend, of course, on next week's Fed policy meeting, where we see scope for markets to price in a less-dovish view.”

“The pair's technical backdrop also suggests some moderate downside risks, in our view. Here, we think initial support will remain in place around 1.2145 (+/-), with 1.2105 and 1.2040/50 as the next main attractors to the downside. At this stage, however, we also do not look for a dramatic correction lower.”