EUR/USD nears yearly low with Fed rate hike at hand

EUR/USD Rate Talking Points

EUR/USD is trading towards a new monthly low (1.0400) as it extends last week’s series of lower highs and lower lows, and the exchange rate looks set to test the yearly low (1.0349) as the Federal Reserve is widely expected to apply higher interest rates on June 15th.

EUR/USD nears yearly low with Fed rate hike at hand

EUR/USD has depreciated around 3% since the beginning of the month as US Treasury yields hit new yearly highs, and the Federal Open Market Committee (FOMC) rate decision could keep the rate exchange rate under pressure as the central bank is expected to deliver another 50 basis point rate hike.

With that in mind, the U.S. retail sales report update could generate a limited reaction, as the Fed is expected to update the Summary of Economic Projections (SEP), and a change in the forward guidance of the monetary policy is likely to influence the exchange rate. markets as the central bank warns that “a restrictive policy stance may well become appropriate depending on how the economic outlook changes.”

As a result, the US dollar could continue to outperform its European counterpart if the President Jerome Powell and Co. continue to raise their longer-term forecast for the federal funds rate, but EUR/USD may try to defend the yearly low (1.0349) should the central bank maintain the current course of monetary policy.

In turn, more of the same from the FOMC could generate a mixed reaction on EUR/USD as the European Central Bank (ECB) shows greater willingness to shift gears in 2022, but tilting sentiment Retailers looks set to persist as traders have been net long on the pair for most of the year.

The IG Customer Opinion Report shows 68.58% of traders are currently long fillet EUR/USD, with the ratio of long to short traders upright at 2.18 to 1.

The number of net long traders is 1.81% higher than yesterday and 12.16% higher than last week, while the number of net short traders is 3.46% higher than yesterday. yesterday and 26.05% lower than last week. The rise in net buying interest fueled crowded behavior as 57.33% of traders were net long EUR/USD at the start of the month, while the drop in net position at the selloff comes as the exchange rate trades at a new monthly low. (1.0400).

That said, EUR/USD may continue to dig a series of lower highs and lower lows over the next few days as the Fed is expected to put in place higher interest rates, and a move below 30 in the Relative Strength Index (RSI) is likely to be accompanied by further decline in the exchange rate like the price action seen earlier this year.

Daily EUR/USD rate chart

Source: Commercial view

• EUR/USD approaches yearly low (1.0349) after testing the 50-day SMA (1.0656) for the first time since March, and the exchange rate may continue to follow the negative slope of the moving average as it reveres price action after the string of failed attempts to test the May high (1.0787 ).
• The break/closure under the Handle 1.0500 (100% expansion) open it 1.0330 (161.8% extension) to 1.0370 (38.2% extension) Region, which lines up with the 2003 low (1.0334)with the next area of ​​interest around 1.0070 (161.8% expansion).
• will keep a close eye on Relative Strength Index (RSI) as it runs into oversold territory, with a break below 30 in the oscillator likely to be accompanied by further decline in EUR/USD like the price action seen earlier this year.
• However, EUR/USD’s recent series of lower highs and lower lows could break down if it fails to break/close below the Region from 1.0330 (161.8% expansion) to 1.0370 (38.2% expansion)with a displacement above the Handle 1.0500 (100% expansion) bringing the 1.0640 zone (78.6% expansion) back to the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong