Euro-dollar strengthens support but Fed shadow darkens horizon

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– EUR / USD supported at 1.2050 and 1.21
– But 1.2218, 1.2266 obstruct the north road
– As the Fed casts long shadows, thin discussions loom
– Although the purchase of foreign currency from China begins this week

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  • Reference rate EUR / USD at publication:
  • Place: 1.2144
  • Bank transfers (indicative guide): 1.1748-1.1833
  • Specialist money transfer rates (indicative): 1.2064-1.2089
  • More information on obtaining specialized rates, here
  • Set up an exchange rate alert, here

The Euro-dollar exchange rate has dug its heels above 1.21 in recent days while benefiting from near double-barrel technical support on the charts, although its upward trajectory is eclipsed this week by the risks associated with Federal Reserve (Fed) monetary policy.

The European unified unit held mostly above 1.21 during June’s ongoing upward correction in US exchange rates, during which the euro-dollar held up relatively well, including during a rapid rebound last Friday and again Monday from its 50-day moving average around 1.2095.

While the level referenced above remained intact on Tuesday, the euro was also potentially supported lower by the 55-day average at 1.2064 and a Fibonacci retracement level around 1.2050, which all offer at least a minimum of technical support to the single. motto.

“A fall through the next mid-May low at 1.2052 on a daily chart’s close basis would likely trigger a deeper retracement to the 1.1994 / 86 support band ( mid-March and April 22 as well as the lows of May) which should ideally keep the downside, ”says Axel Rudolph, senior technical analyst at Commerzbank.

“Only a currently unexpected bullish reversal above last week’s high at 1.2218 would re-trigger the late May high at 1.2266, which keeps January’s high of 1.2349,” said Rudolph.

The euro-dollar exchange rate is well supported on the charts and could be helped in what is a quiet week for local influences by a decision in early June of the People’s Bank of China (PBoC) to increase the foreign exchange reserve ratio required by domestic lenders.

EUR to USD per day

Above: Euro-Dollar at daily intervals with Fibonacci retracements of the April rally and 21 and 55 day averages.

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This went into effect on Monday, June 14, a public holiday in China, and is essentially an instruction for lenders to buy foreign currency in an amount that analysts say could run to around $ 20 billion.

It is less clear now whether these lenders would buy euros, dollars or other currencies, although the main event for the euro-dollar rate in the coming week is the Fed’s policy decision on Wednesday at 7:00 p.m.

“While there may be some disappointment for the USD on the event, we expect it to be short lived. We see a possibility for EUR / USD to test 1.20 this summer in anticipating the start of the Fed’s cutback discussion for good, ”says Jane Foley, senior currency strategist at Rabobank.

“ECB President Lagarde made it clear last week that there would be no change in the central bank’s asset purchase program for now. In terms of inflation risk, this has always been colder in the eurozone than in the United States, “adds Foley.

No changes to the fed funds rate or its $ 120 billion quantitative easing (QE) program are expected this month, although the market is closely scrutinizing the dot chart of policymakers’ projections for future interest rates on whether higher borrowing costs and increased investor returns are expected to materialize well ahead of the earlier indicated date of 2024.

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Exchange rates will also be tuned in to any changes in the Fed’s guidance on the future of its quantitative easing program, which buys $ 80 billion in U.S. government bonds per month and $ 40 billion. mortgage bonds.

This is particularly important for the euro and the dollar given that many investors have long expected that a gradual or steady wind-up of the program will begin towards the end of the year and also after several senior politicians have withdrawn. the bank recently suggested that they might start talking about exactly that soon. .

“If the FOMC didn’t disrupt the markets, we would expect EUR / USD to rise towards the end of the week,” said Chris Turner, Global Head of Markets and Regional Head of Research at ING.

Any decrease would mean less pressure on U.S. bond yields and could potentially give the dollar a boost if those yields rise enough to attract outside investors, whose anticipation could be tied to why the greenback rose against it. most of its counterparts in June.

But there is a risk of disappointment for the dollar, which would support EUR / USD in the second half of the week, given that policymakers who have suggested they may soon consider discussing the program’s cutback. quantitative easing did so before May. -report on agricultural wages at the beginning of this month.

EURUSD and DXY weekly

Above: Euro-Dollar at weekly intervals with the US dollar index.

The May Jobs Report found job growth of over 500,000, which would have been quite a celebration in a pre-pandemic time, although the result was actually lower than the 645,000 predicted by the government. consensus and still leaves the Fed a long way off. “new substantial progress” he wanted to see before considering a change in his QE program.

This could potentially lead Fed Chairman Jerome Powell to adopt a stance on Wednesday that is not too far removed from that taken by the European Central Bank (ECB) last week, when President Christine Lagarde welcomed the progress made in containing the coronavirus and reopening economies, but stressed that it was too early for the bank to cut back on its supportive policy programs due to the persistent risks to the recovery.

“The ECB made it clear again last Thursday that it would continue to err on the side of caution despite an improving economic outlook and a short-term spike in inflation beyond its previous estimates. On Wednesday, the US Fed will follow suit. probably the step, by raising its inflation projections without significantly changing the outlook for its policy, ”said Holger Schmieding, chief economist at Berenberg.

“The fact that the Fed will likely announce this week that it will discuss a strategy to reduce its asset purchases at its subsequent meetings appears to be taken into account. As central banks on both sides of the Atlantic adjust almost certainly their policy later this year to reflect the strong economic rebound and the prospect of a gradual increase in core inflation, the risk that they will do too much and derail the economic recovery over the years. next two years still seems a long way off, ”Schmieding said.

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