Tough Task for ECB as Periphery Spreads Widen, EUR/USD Below 1.05

EUR/USD TALKING POINTS

• Upcoming Fed rate decision.
• Periphery spreads widen.
• EUR/USD bears look to subsequent support.

EURO FUNDAMENTAL BACKDROP

The euro has continued to depreciate against the dollar after last week’s surprise U.S. inflation beat that added to the Fed’s hawkish narrative. The week ahead includes several high impact events with focus on the Fed’s interest rate decision on Wednesday.

EUR/USD ECONOMIC CALENDAR

Source: DailyFX economic calendar

Money markets are unsurprisingly pricing in a 50bps hike (see table below) which should keep the dollar buoyant against the euro heading into the rate announcement.

FEDERAL RESERVE INTEREST RATE PROBABILITIES

Source: Refinitiv

Today sees several European Central Bank (ECB) officials scheduled to speak and bring further insights into ECB President Christine Lagarde’s statement last week. These include Robert Holtzmann, Gediminas Simkus, and Luis de Guindos.

There has been much talk around the challenge for the ECB regarding periphery bonds and the euro. Periphery bonds relate to the so called ‘non-core’ nations representing the EU such as Spain or Italy as they carry higher bond yields along with more volatile spreads. The gap/spread between Italian bonds and the benchmark German bond are increasing as fears around rising interest rates will make debt obligations harder to meet. Navigating a weakening euro with the periphery banks conundrum requires a fine balancing act by the ECB to maintain order in the eurozone.

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Price action on the daily EUR/USD chart above shows bears taking the pair through the psychological zone. 1.0500 zone, opening up room for a retest of the January 2017 swing low at 1.0340. It is difficult to see upcoming euro strength with the current U.S. backdrop favoring the Fed front loading rates as inflation does not seem to be abating.

Resistance levels:

Support levels:

IG CLIENT SENTIMENT DATA: MIXED

IGCS shows retail traders are currently LONG on EUR/USD, with 67% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however due to recent changes in long and short positioning we arrive at a mixed bias.

Contact and follow Warren on Twitter: @WVenketas