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EURUSD Trend Reversal Stalls after Powell Remarks

EURUSD Trend Reversal Stalls after Powell Remarks

EURUSD, Dollar, Interest Rate and FOMC Talking Points Talking Points:

  • The Market Perspective: EURUSD Bearish Below 1.0700
  • The technical structure behind EURUSD the past four months has put the power back into the bulls’ control, but the strong reversal just of the past four days may change our course
  • Fed Chairman Powell caused more than his fair share of volatility this past session in Dollar pairs, but the FX market may have already been prompted to pull out of its dive before his remarks
How to Trade EUR/USD
How to Trade EUR/USD
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How to Trade EUR/USD
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While EURUSD’s course these past four months wasn’t exactly a one-way move, the bulls have been in general control of the benchmark pair since the November 4th release of the October nonfarm payrolls (NFPs). The 1,275 pip rally – approximately equivalent to 13 percent – was the biggest 12-week or three-month charge for the benchmark exchange rate in nearly 12 years. At a certain point, the market would find itself stretched and increasingly dependent on solid fundamental motivation to keep such a trend under power. What we have seen this past week, however, has done the opposite. The Euro’s improved fundamental backdrop between upgraded growth forecasts and the hawkish rhetoric from the ECB playing catchup to its counterparts seems to have been a consideration to the rise to the 1.10 level. Last week’s rate hike by the European authority and commitment to hike at least another 50bp clip at the next meeting roused neither an upgrade in the Euro nor European 2-year yields.

Meanwhile, the US combo of the labor report and service sector activity from this past Friday offered the Greenback an overdue relief rally. The charge was not on a typical fundamental basis of a stronger economic forecast but rather an upgraded interest rate forecast. Nonetheless, the push was enough to earn EURUSD a break from its risk wedge of the past three months and slip additional technical levels in a longer-term 61.8 Fib retracement and former ‘pivot’ around 1.0770. Yet, as of Tuesday’s close, the 50-day simple moving average (SMA) conspicuously remains unbroken. After a volatile day fueled by remarks by Fed Chairman Jerome Powell, we also see wild intraday swings that have produced large ‘wicks’ that register as indecision to technicians.

EUR/USD Bullish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -17% 10% 0%
Weekly -9% 13% 6%
What does it mean for price action?
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Chart of EURUSD of 50-Day SMA with ‘Wicks’ (Daily)

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Chart Created on Tradingview Platform

On a fundamental basis, the influence of interest rates aligns distinctly from a visual and statistical perspective. The recent correlation between EURUSD price action and the ebb and flow of the EU-US 2-year government bond yield differential has been particularly strong. That said, the charge in US interest rate expectations over the past 72 hours of active trade has played a disproportionate role in driving this exchange rate to reversal. In particular, the rally in yields and implied Fed Funds rates via futures was levered by the implications of the more than half a million increase in national payrolls and sharp rebound in service sector activity – the largest source of output for the US economy. The 2-year Treasury responded by rallying from approximately 4.10 percent up to 4.47 percent, while the implied terminal Fed Funds rate through June futures jumped from 4.88 to 5.10 percent. Powell’s remarks this past session can be interpreted to suit both dovish or hawkish interpretations, but I think it is worth noting that these aforementioned rates leveled out many hours before he spoke. Ultimately, I consider his remarks slightly more hawkish that what he stated last week in the presser, but US interest rates are unlikely to climb further unless there is a serious upgrade in inflation pressures – and we don’t have an update on that front until next Tuesday’s CPI.

Chart of EURUSD Overlaid with EU-US 2-Year Yield Differential (Daily)

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Chart Created on Tradingview Platform

It’s possible that one of the five scheduled Fed speakers in the next 24 hours can collectively move the Fed’s perceived needle, but that would be out of step of recent trends. In the absence of a change in US interest rate forecasts, another fundamental motivator needs to come along to push the market one way or the other. With the Euro docket all but empty through week’s end, it is likely that we will need to draw from another source. Headlines are always a viable risk, but it isn’t particularly reliable when plotting probabilities – much less scenarios. Another source of influence worthy of mention for EURUSD is the influence of general ‘risk trends’. The Dollar has seen its role as a ‘safe haven’ currency revived recently; and while the corollary to the world’s most liquid currency pairing isn’t as strong as some other crosses, the relationship is still distinct. If there is a jump in the equities-based VIX, a EURUSD is likely more through the Dollar’s influence; but the particular read of the CME’s EVZ Euro volatility index should be monitored more closely. Should it continue to advance, the inverse correlation to the pair could offer enough push to resolve the 50-day SMA.

Chart of EURUSD Overlaid with Inverted Euro Volatility Index (Daily)

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Chart Created on Tradingview Platform

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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