EUR/USD Rate Approaches Yearly Low with Fed Rate Hike on Tap

EUR/USD Rate Talking Points

EUR/USD trades to a fresh monthly low (1.0400) as it extends the series of lower highs and lows from last week, and the exchange rate appears to be on track to test the yearly low (1.0349) as the Federal Reserve is widely expected to implement higher interest rates on June 15.

EUR/USD Rate Approaches Yearly Low with Fed Rate Hike on Tap

EUR/USD has depreciated approximately 3% from the start of the month as US Treasury yields climb to a fresh yearly highs, and the Federal Open Market Committee (FOMC) rate decision may keep the exchange rate under pressure as the central bank is anticipated to deliver another 50bp rate hike.

With that in mind, the update to the US Retail Sales report may generate a limited reaction as the Fed is slated to update the Summary of Economic Projections (SEP), and a shift in the forward guidance for monetary policy is likely to influence foreign exchange markets as the central bank warns that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook.”

As a result, the US Dollar may continue to outperform against its European counterpart if Chairman Jerome Powell and Co. continue to raise their longer-run forecast for the Fed Funds rate, but EUR/USD may attempt to defend the yearly low (1.0349) should the central bank retain the current course for monetary policy.

In turn, more of the same from the FOMC may generate a mixed reaction in EUR/USD as the European Central Bank (ECB) shows a greater willingness to shift gears in 2022, but the tilt in retail sentiment looks poised to persist as traders have been net-long the pair for most of the year.

The IG Client Sentiment report shows 68.58% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 2.18 to 1.

The number of traders net-long is 1.81% higher than yesterday and 12.16% higher from last week, while the number of traders net-short is 3.46% higher than yesterday and 26.05% lower from last week. The rise in net-long interest has fueled the crowding behavior as 57.33% of traders were net-long EUR/USD at the start of the month, while the decline in net-short position comes as the exchange rate trades to a fresh monthly low (1.0400).

With that said, EUR/USD may continue to carve a series of lower highs and lows over the coming days as the Fed is expected to implement higher interest rates, and a move below 30 in the Relative Strength Index (RSI) is likely to be accompanied by a further decline in the exchange rate like the price action seen earlier this year.

EUR/USD Rate Daily Chart

Source: Trading View

• EUR/USD approaches the yearly low (1.0349) after testing the 50-Day SMA (1.0656) for the first time since March, and the exchange rate may continue to track the negative slope in the moving average as it reveres course following the string of failed attempt to test the May high (1.0787).
• The break/close below the 1.0500 (100% expansion) handle opens up the 1.0330 (161.8% expansion) to 1.0370 (38.2% expansion) region, which lines up with the 2003 low (1.0334), with the next area of interest coming in around 1.0070 (161.8% expansion).
• Will keep a close eye on the Relative Strength Index (RSI) as it comes up against oversold territory, with a move below 30 in the oscillator likely to be accompanied by a further decline in EUR/USD like the price action seen earlier this year.
• However, the recent series of lower highs and lows in EUR/USD may unravel if it fails to break/close below the 1.0330 (161.8% expansion) to 1.0370 (38.2% expansion) region, with a move above the 1.0500 (100% expansion) handle bringing the 1.0640 (78.6% expansion) area back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong