Saturday, April 21, 2018
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EUR/USD: Focus on diverging central bank expectations ahead of Fed
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  • Euro under pressure due to diverging central bank expectations. 
  • ECB lift off in 2019, a distant dream.
  • Yield differential widens in the USD-positive manner. 

The common currency traded on the backfoot against the greenback in Asia and will likely extend losses in Europe and US session, courtesy of diverging monetary policy expectations.

The bullish breakout in the Euribor futures, as discussed on Friday, indicates the markets no longer expect the European Central Bank (ECB) to raise rates in 2019. Meanwhile, speculation is gathering pace that Fed would revise higher its dot plot chart to four 2018 rate hikes at the forthcoming meeting.

Consequently, the 10-year US-German yield spread has jumped to the highest level since late 2016. Thus, the EUR is becoming less attractive.

Focus on Fed’s wording

The Fed is widely expected to raise rates by 25 basis points on Wednesday – a move that has been priced in by the markets. That said, investors will look for cues on whether Powell sees need to hike rates at a faster pace. Also, USD will likely surge across the board if the Fed puts more stress on the inflationary impact of trade wars.

EUR/USD Technical Levels

As of writing, the currency pair is trading around 1.2270. A close below 1.2273 (March 9 low) would establish lower lows and lower highs pattern (on the daily chart) and open doors for 1.2154 (March 1 low) and 1.2089 (Jan. 1 high). On the higher side, a close above 1.2319 (21-day MA) could yield a rally to 1.2413 (March 14 high). A close higher would signal revive the short-term bullish outlook and allow a stronger rally to 1.2556 (Feb. 16 high).

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