Euro Firms on US Dollar Weakness as Fed Hawks Undermine Equities. Has EUR/USD Peaked?

Euro, EUR/USD, US Dollar, USD/JPY, Fed, ECB, BoJ, China, Crude Oil – Talking Points

• Euro support reignited after US Dollar eased to start the week
• While the Fed is on its tightening track, the BoJ might see some flexibility
• China could be shifting toward growth, but Covid-19 issues remain

The Euro inched higher on Monday as the US Dollar gave up Friday’s gains across the board. EUR/USD made a six-month high last week amid rate hikes from both the Federal Reserve and the European Central Bank.

While comments from the leaders of both banks made it clear that more hikes are coming, it appears that Fed board members were more convincing in talking up their hawkish credentials.

Equity markets have slid lower in the aftermath of Cleveland Fed President Loretta Mester’s remarks on Friday. She backed up Fed Chair Powell’s comments that rates will need to remain high to tame inflation.

Wall Street finished last week lower and APAC equity indices are in the red across the region today. Futures are pointing to a steady start to the North American cash session.

Market sentiment swayed somewhat through the Asian session with conflicting factors emerging. On the positive side, a change of tone from China’s central economic work conference alluded to a more business-friendly stance from the government.

On the flip side, the speedy exit from their zero-case Covid-19 policy might be presenting challenges as the virus is allowed to spread. Official figures remain very low but there is increasing anecdotal evidence of incidents being significantly higher.

The Japanese Yen saw notable gains at the opening bell after a weekend report from Kyodo News. It cited unnamed government sources that suggested Japanese Prime Minister Fumio Kishida is considering a more flexible approach to the 2% inflation target.

USD/JPY dipped to 135.79 to start the week after closing at 136.60 on Friday. It has since recovered and moved back toward 136. The Bank of Japan will be meeting tomorrow to discuss monetary policy but their ultra-loose setting is expected to be maintained.

US natural gas prices eased after the cold snap there appears to have run its’ course. EU Energy ministers will be meeting later today to consider a gas price cap.

Crude oil is firmer with the WTI futures contract near US$ 75 bbl while the Brent contract is approaching US$ 80 bbl. Gold is settled around US$ 1,790 so far on Monday.

Germany’s IFO survey will be the data highlight for today.

The full economic calendar can be viewed here.

EUR/USD TECHNICAL ANALYSIS

The recent EUR/USD rally broke above the upper band of the 21-day simple moving average (SMA) based Bollinger Band. It closed back inside the band last Thursday, and this may signal a pause in the bullish run or a potential reversal.

Support could be at the previous lows at 1.0443, 1.0290 and 1.0223. On the topside, resistance might be at the recent peak of 1.0736 or the June highs of 1.0774 and 1.0787.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter