The EURUSD pair saw a massive sell-off yesterday, fueled by the strengthening of the dollar and a rise in 10-year US bond yields. It was caused by another surprise in yesterday's US macro readings, which indicated a still very low number of unemployment claims and a drop in continuing claims. What's more, February US PPI inflation - headline and ex-transport measures - surprised in both annual and monthly dynamics, adding some concerns to Tuesday's higher-than-forecast CPI report. Also reported U.S. business inventory levels showed a 0% m/m growth rate against an expected 0.2%, and have been falling recently as sales have been rising.
The overall picture of the economy shown by the data indicates that while consumers are still quite resilient, and with high employment, solid wages and very low unemployment, there is some tail risk in a 'normalization' scenario for Fed policy. In such an environment, the Federal Reserve may want to delay rate cuts. Especially if the situation does not change until the highly anticipated June, and services inflation excluding housing (where the base effect works in favor of declining momentum) remains higher - around 4% or higher (3.9% in February). The Eurodollar's response to yesterday's data seems to reflect concerns around 'higher for longer' in the US. Yields on the 10-year note have risen from near 4.1 to nearly 4.3% in the past few days.
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Looking at the EURUSD chart, we see that the pair is defending the short-term trend line at 1.087, which coincides with the 38.2 Fibonacci retracement of the mid-February growth impulse. At this level, the pair halted the declines, although if we look at the volumes, we see that sellers on the pair definitely dominate; the halt in the price action was due to exhaustion of sellers rather than heavy buying. On the other hand, de Guindos indicated that the Eurozone economy will recover in the second half of the year, and it seems that in the scenario of further weaker data from the US, investors could consider returning with long positions on EURUSD.
Source: xStation5
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