EUR/USD is mildly bid despite hawkish Fed, Eyes ECB

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  • EUR/USD faded post-Fed drop to 1.1725 and was last seen trading at 1.18.
  • Limited upside scope for US yields as the Fed tightening cycle is set to end sooner-than-expected.
  • German bond yields and EUR will likely rally sharply if ECB discusses QE taper.

The EUR/USD recovered from the post-Fed low of 1.1725, possibly because the ongoing tightening cycle is set to end sooner-than-expected.

The Fed signaled two more rate hikes this year, i.e. accelerated rate hikes, but kept the neutral rate unchanged. So, the rates are seen rising to a neutral rate by end of 2019, meaning the policy tightening cycle will end in about 1.5-year.

The fact that Fed is nearing the end of the policy tightening cycle means there is limited upside in US bond yields. Meanwhile, across the pond, the European Central Bank (ECB) is still telegraphing a QE taper. So, there is plenty upside scope in the German and Eurozone bond yields.

Market expects ECB to discuss taper

A consensus is building that time is ripe for QE taper. A significant majority also believes the increasingly murky economic outlook and rising odds of trade war could complicate matters for the ECB.

However, these factors may actually force the ECB to hasten QE taper as there would be much less room for taper/policy tightening if the situation takes turn for worse in the near future.

So, the common currency could pick up a strong bid if the ECB discusses QE taper today. On the other hand, the common currency could run into offers if the ECB tapers the “taper talk”.

EUR/USD Technical Levels

Resistance: 1.1840 (June 7 high), 1.1957 (bearish 50-day moving average), 1.2008 (200-day moving average).

Support: 1.1753 (10-day moving average), 1.1618 (June 1 low), 1.1510 (May 29 low).

 

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