EUR/USD: Four reasons for a correction

EUR/USD has hit 1.11 – the highest since March – amid hopes for EU stimulus, dollar weakness but the sharp run may be followed by a temporary rethink and a drop. Yohay Elam, an analyst at FXStreet, explains the reasons which support this view.

Don’t miss: Eurozone Inflation Preview

Key quotes

“The ‘Frugal Four’ – Austria, the Netherlands, Sweden, and Denmark – previously voiced their objections to the European Commission’s ambitious plan, which includes €500 billion of grants funded by mutual borrowing. While the continent’s largest economies usually get what they want, any public rejection by these hawkish countries may cast doubts and trigger a correction.”

“The US is set to retaliate for China’s new security law – tightening Beijing’s grip on Hong-Kong. After Secretary of State Mike Pompeo certified that the city-state is no longer autonomous, President Donald Trump is set to deliver a speech announcing measures to retaliate against China. Uncertainty ahead of Trump’s speech may cause a return to usual behavior – dollar strength.” 

“Preliminary eurozone consumer prices for May are set to fall, reminding investors that the ECB has additional reasons to maintain its accommodative policy. In the US, Personal Income, Personal Spending also the Fed’s preferred gauge of inflation may also paint a gloomy picture, weighing on sentiment.”

“The last day of the week is also the final trading day of May. Money managers adjust their portfolios and may push EUR/USD closer to the range seen throughout the month. While such choppy moves are unlikely to change the trend, they could cause jitters in the European afternoon, around the London fix.”