Despite closing the week on a positive note, the tone has been generally softer in the Euro, with market participants fading the recent breakout. As of now, it is really about gearing up for the next week’s Federal Reserve meeting and as shown in the table below, markets are expecting an uber-hawkish Fed. However, what has been fascinating has been the US Dollar’s tame reaction to the sizeable repricing in the last two weeks, with many going from two to four rate hikes this year, with the addition of quantitative tightening by Q3.
Now, it has been mentioned at length, that the greenback’s muted response has largely stemmed from stale long positions, while US equity outflows have been a negative for the greenback That being said, I do believe we are at a stage where perhaps the market has gotten ahead of itself in pricing a hawkish Fed. The issue is, with a hike priced in March and a total of four hikes priced in for 2022, this leaves the Fed with a high bar to surprise on the hawkish. In which case, should we see a hawkish disappointment (relative to expectations), I would expect further downside in the USD with a squeeze higher across risk assets, which over the past week have taken quite a beating. Right on cue during OPEX week, may I add. Aside from the Fed, we will also be watching the flash PMIs.
EUR/USD: Trendline support remains intact for now with the pair maintaining its uptrend. However, should trendline support see a close below, risks would be geared towards 1.1260-70. Initial resistance at 1.1380-85 with 1.1450 above.
EUR/GBP: A slight reversal in the cross, having tested the 0.8300 handle and now back to prior support, now resistance at 0.8380. As it stands, the RSI is showing a bullish divergence, with lower lows in the price, meeting higher highs in the RSI. However, for a risk of a trend reversal a close and hold above 0.8385 would be needed. For now, the bias remains to fade rallies.