- The higher terminal rate could push up the treasury yields and the US dollar.
- Powell’s take on trade wars and inflation eyed.
The EUR/USD pair fell from 1.2355 to 1.2240 on Tuesday, creating another lower high on the daily chart, courtesy of the disappointing German Zew survey and the drop in the bond yields across the Eurozone.
Also, expectations of hawkish Fed and the rise in the short duration treasury yields seem to have played a role in pushing the pair lower.
As of writing, the spot is trading at 1.2262. The previous day’s close of 1.2242 was the weakest since March 1 and has opened doors for a drop to 1.2072 (100-day moving average).
Focus on Fed, an upward revision of terminal rate would be USD bullish
The USD will likely surge across the board if the Fed revises higher the 2019/2020 interest rate forecasts, signaling scope for a higher terminal rate. As of now, the market believes the new normal interest rate (also known as a terminal rate or peak rate) is 2.50-2.75 percent.
Also, the EUR/USD could take a beating if Powell, during the press conference, puts more emphasis on the inflationary impact of the trade wars.
However, there is widespread belief that hawkish expectations are overdone and Powell will likely avoid being too hawkish, given the yields and the dollar funding costs (Libor-OIS 3 month spread) is already on the rise. So, the EUR/USD may jump if Powell revises higher the short-term rate forecasts as expected and hikes rates by 25 basis points as expected.
EUR/USD Technical Levels
A break below 1.2240 (previous day’s low) could yield a sell-off to 1.2154 (March 1 low) and 1.2072 (100-day MA). On the higher side, breach of resistance at 1.2314 (10-day MA) would expose resistance at 1.2355 (previous day’s high) and 1.2413 (March 14 high).