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 high, 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.

David Song | Analyst, DailyFX, New York City
14 June 2022

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