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EUR/USD retreats as 1/4 legs of the rally drops

Euro/dollar trades around 1.0750, back to the 1.0720 to 1.0775 range that characterized it earlier in the month. The move to 1.0905 has been fully reversed.

The rise of EUR/USD was based on four pillars. The last of these pillars has fallen off the stool. So, while the pair is still supported, it lost its steam. Here are the drivers:

  1. Donald Disillusion: Since the colossal  failure to pass health-care reform by Trump and the  Republican Party, they  vowed to move on to tax reform. However, Trump signed an executive order curbing climate change regulations and not taxes. Talk about reviving tax reform has not been fruitful. All in all, no change and this remains a dollar negative factor.
  2. Fed’s dovish hike: Many FOMC officials have been on the airwaves but they have not changed the notion that the Fed will move very gradually. Three hikes are on the cards, but markets remain skeptical. No change.
  3. Optimism about politics in Europe: Macron continues leading in the polls and Merkel won in Saarland. This leg of the rally actually strengthened and helps the euro.
  4. Hawkish tilt from the ECB: Here is where the change comes from. The European Central Bank removed its wording about “using all instruments” in the latest rate decision. Draghi explained that it reflected a change: “no sense of urgency“. The shift shifted the euro upwards. And now the ECB backs down. In a second clarification. the ECB reported says that the message was “over-interpreted”. They only meant to say there was a reduced tail risk but did not wish to communicate a first step towards the end of QE.

The ECB is now on par with the Fed: both are cautiously optimistic but do not change their outlooks. The Fed is set to maintain the previous path of rate hikes in 2017 and the ECB will continue with QE in 2017 as announced in December 2016.

What’s next for both central banks? That will determine the next  moves of EUR/USD, but central banks can take their sweet time.

More:  EUR/USD: Trading the US Final GDP

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.