The dollar index and the EUR ended in the opposite direction on Monday, as traders eyed cues from the Federal Reserve meeting week amid stronger yields. It was a good start to the cryptocurrencies on Monday’s opening session but a quiet start to the currency market ahead of the FOMC meeting on Wednesday. European currencies like EUR, GBP, NOK, and SEK ended lower against the dollar.
FX & Bonds:
The common currency has pushed through 1.1980 against the dollar last week, which sees its first weekly gains in three weeks. It is not about the currency action that is keeping traders busy; it is the bond market. So, we discuss more yields this week than the currency EUR.
Since November 2020 low -0.67%, German 10year bunds rallied to -0.332%. The recent yields surge across the globe (especially advanced economies) suggested the light at the end of the tunnel. Last year historical yields lower were recorded on a combination of structural and cyclical factors.
The brighter global outlook was elevated by the move higher in the bond yields, which reflects market expectations of future inflation, which eventually means higher borrowing costs or tighter monetary policies around the world. The key element of the higher yields means financial markets are busy in pricing the timing of the higher interest rates, and economists are upgrading their forecasts. In February, we forecast UST 10year yield to rally towards 1.50% and 1.75%; last Friday, it was closed at 1.65% pre-pandemic highs. How high it can strength is the driver to the EURUSD?
If the dollar index float higher, selling EUR favors the trend.
Here’s what Fed Chair Jowell Powell and ECB president Christine Lagarde’s said on the higher yields. “Chair Jerome Powell has yet to push back against the rise in longer-term yields. On the contrary, Powell seemingly welcomed this development as a sign that investors have confidence the US will have a robust, complete recovery. European Central Bank president Christine Lagarde, for her part, has displayed more concern on the potential for this backup in yields to adversely affect the nascent recovery on the continent.” As per the UBS Macro Monthly report.
Since the beginning of this year, the real rates in the US have risen more than in Europe. US 10year yields breakthrough 1.60%-mark last Friday as Washington passed the $1.9 trillion dollar plan.
In Europe, 10yr Bunds (Germany) & OATs (France) have increased by 30.0bps, whereas In North America, 10yr Treasury yields have gained 65.0bps, as per the CIBC FX Weekly report. Here’s the chart.
ECB review: In last week’s ECB statement, “yield” was referred to 17 times compared to nine times in January. One can imagine how Yields grabs the driver seat.
As expected, ECB kept its key policy rates unchanged and no change in forwarding guidance too. We draft that the March ECB meeting was slightly dovish, as the market is expecting to pace up the PEPP.
Looking ahead, FOMC should be the key risk factor this week. There is a lot of focus on the dots plot and forecasts area.
Ahead of this week’s FOMC meeting, EURUSD longs were trimmed significantly, as per Danske Bank’s IMM report. Besides, MUFC Bank said, “Asset Managers cut their USD shorts positions by the largest on record to last Tuesday while leveraged accounts also cut short USD positions, but not as aggressively.”
TECHNICAL OVERVIEW
The EURUSD printed a lower higher pattern just a day before the January FOMC meeting and now trading 2.50% lower since the last meeting. During the same period, USDT 10yr yields rose nearly 70bps. Clearly rate differential dragging the common currency since the beginning of this year.
The theme for this week is long EUR if the dollar index breaks down or sell EUR if USD trading higher. If you are EUR bull, then EURCHF is the pocket you must concentrate on. Buying dips favor the near and medium trend.
Levels to watch 1.1830, its 200MA, 1.1800, its 100MA (monthly), and 1.1750, its 61.8 fib reaction. So, overall, it’s a thick support zone one should think twice if you want to sell at the current market price. If the price starts moving higher, the resistance to look at is 1.2000 and 1.2120.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
What is your Technical View?
Do you have a different idea? Please leave us a comment and get an answer from our professional analysts