EURUSD reverses its technical trend 💡

On Monday, the EUR/USD exchange rate broke through an important technical barrier marked by the 200-day exponential moving average, also briefly breaching the 1.16 zone and reaching levels not seen for almost two months. Maintaining this momentum and closing the intraday candle above this level could seal a reversal of the long-term trend towards a more bullish one. 

The sell-off in the US currency is continuing despite ongoing tensions in the Middle East. Although the lack of progress in US-Iran negotiations is keeping Brent crude prices around $89 a barrel, the dollar – traditionally regarded as a safe haven and supported by the US’s position as a net exporter of crude – is failing to gain ground.

Weak data are causing a reassessment of expectations regarding the Fed

The current weakness of the US currency is primarily due to disappointing macroeconomic data. This has prompted the markets to significantly revise their expectations regarding the Federal Reserve’s (Fed) future moves. Market pricing of the interest rate path has cooled dramatically compared with the situation four weeks ago. According to the latest data, investors are no longer pricing in a rate rise at either the September or October meetings. The probability of a rate rise at the final meeting in December has fallen to around 85 per cent. Source: XTB

The key factor tempering the Fed’s ambitions is the state of the economy. The US labour market has entered a ‘low fire-low hire’ phase, as indicated by weaker NFP figures, even though the unemployment rate and weekly jobless claims continue to hover around multi-year lows. A marked slowdown is evident in consumption – Friday’s figures revealed the first fall in retail sales in nine months (-0.6 per cent m/m), which concerned analysts all the more as the negative result persisted even after excluding sales of cars and fuel.

Meanwhile, last week’s CPI (in line with expectations) and PPI (lower than forecast) inflation figures allayed market fears of a resurgence of sharp price pressures. Markets currently assess the likelihood of so-called second-round inflationary effects as low, which buys the Federal Open Market Committee (FOMC) time to assess the impact of the energy shock on the economy.

Politics casts a shadow over the central bank’s independence

The dollar’s depreciation is also accompanied by growing concerns about the Federal Reserve’s own independence. Speculation has intensified following reports of renewed attempts by the former president to dismiss one of the FOMC’s decision-makers, Lisa Cook. Political pressure is causing the bond yield curve to steepen. Yields on short-term bonds are falling in line with dovish expectations, whilst yields on long-term, 30-year bonds remain close to 25-year highs.

In the coming days, market attention will focus on Friday’s release of the US PMI figures. However, the key event of the month for the dollar and future interest rate expectations remains the annual symposium in Jackson Hole, scheduled for 27–29 August, during which markets will be looking for the Fed to make a clear statement on the weakening economic outlook.

On Monday, EURUSD broke through an important technical barrier marked by the 200-day exponential moving average, also breaching the 1.16 zone (although some of the upward momentum was subsequently reversed) and reaching levels not seen for almost two months. The RSI remains elevated on a 14-day average, but has yet to breach the textbook 70-point level, which is sometimes regarded by parts of the market as a potential overbought zone. Source: xStation