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Euro Wilts as Soaring Treasury Yields Lift US Dollar. Will EUR/USD Break Down?


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EURO, EUR/USD, US DOLLAR, TREASURIES, BOJ, USD/JPY, CRUDE OIL - TALKING POINTS

  • The Euro was caught in the US Dollar crossfire as yields leapt today
  • BOJ policy is unchanged but a lifted inflation outlook smoked APAC equities
  • If yields continue higher, where does that leave the single currency?
Euro Wilts as Soaring Treasury Yields Lift US Dollar. Will EUR/USD Break  Down?

The Euro has retreated again today after US Treasury yields continued higher in anticipation of the Fed lifting rates at their March FOMC meeting.

The Bank of Japan (BOJ) also added to hawkish expectations after raising their inflation forecasts.

The BOJ left monetary policy unchanged after their 2-day meeting today, but they have raised their 1-year inflation forecasts to 1.1% from 0.9%.

The market had been looking for more evidence of a wind-back of ultra-easy policy. The Yen depreciated across the board as a result, with USD/JPY initially climbing above 115.00 but then retreating as risk assets were sold off.

When Japanese markets re-opened after the lunch break, Treasury yields resumed their march higher. The benchmark 10-year note climbed to a new high above 1.85% and the 2-year went above 1.05%.

This left interest rate-sensitive tech stocks particularly vulnerable and Nasdaq futures were down over 1% as a result. The S&P 500 and the Dow futures were down to a lesser extent.

The tech-laden Korean and Taiwan indices were hit hard as were all developed equity markets across the APAC to some degree.

Mainland China was a notable exception, up slightly on the day after the PBOC cut rates yesterday.

Gold was softer as yields were rising. AUD and NZD were lower but CAD and NOK fared better with oil rallying.

Crude oil prices continued higher with the Brent crude futures contract making a seven year at USD 87.55. The WTI contract is yet to overcome the October high on this run up.

Tensions in the Middle East are adding to supply concerns after the Iran-backed and Yemen-based Houthis’ drone strike on the capital of the United Arab Emirates yesterday.

OPEC are due to deliver their monthly report later today.

The US is back from a long weekend today and there will be the release of the Empire State manufacturing survey as well as the Treasury international capital (TIC) flow data.

 

EUR/USD TECHNICAL ANALYSIS

After breaking higher last week, EUR/USD has retreated to test pivot point support at 1.13830 – 1.13865.

Should it move below there, support might lie at the 10-day simple moving average (SMA) or at the previous lows of 1.12724, 1.12347, 1.12219 and 1.11861.

On the topside, resistance could be at the previous highs and pivot points of 1.14830, 1.15133, 1.15245 and 1.16922.

EUR/USD CHART

Chart created in TradingView

 

Written by Daniel McCarthy, Strategist for DailyFX.com. 18th Jan 2022

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Euro Breaking News: EUR/USD Dismisses Surprise ZEW Economic Sentiment Index Beat.

 

EUR/USD ANALYSIS:

  • EU ZEW economic sentiment ACT: 49.4
  • U.S. Treasuries strengthen dollar.
  • Bear flag poses downside threat to Euro bulls.
Euro Breaking News: EUR/USD Dismisses Surprise ZEW Economic Sentiment Index  Beat

UNEXPECTED EURO AREA ZEW ECONOMIC SENTIMENT INDEX IMPROVEMENT

The German ZEW economic sentiment advance (see economic calendar below) lead the way to the overall Euro area print shift to almost double the December release. The Euro responded marginally positive post-release but heavily weighed down by rising U.S. Treasury yields and a robust dollar.

EURUSD economic calendar

Source: DailyFX Economic Calendar

 

EURO FUNDAMENTAL BACKDROP

Higher U.S. Treasury yields across the curve bolstered the greenback this morning giving the dollar leg of most USD crosses a lift. Soaring crude prices have added to a hawkish Fed as inflationary pressures may be rising after an attack in the UAE, which could hurt supply. Fears of Omicron in China have resulted in several lockdowns throughout the country adding to supply chain disruptions. These factors should give the dollar the upper hand in the near term against the Euro as the central bank divergence between the Fed and ECB remains.

A sixth consecutive negative decline in European car sales registrations for the December period did not help the already fading Euro however, post-announcement price action reflects minimal price change on the pair leading up to the sentiment reading.

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

EURUSD daily chart

Chart prepared by Warren Venketas, IG

The bear flag formation (blue) remains in play on the daily chart as EUR/USD prices continue to wade within the rising channel. The bear flag traditionally points to a bearish continuation but confirmation from a break below flag support (candle close) will be required to approve further downside.

The Relative Strength Index (RSI) favors upside momentum and with the potential of a bullish crossover (20-day EMA crossing above 50-day EMA) in process, the 1.1500 psychological level could be next. This being said, fundamentals firmly encourage the U.S. dollar at this point in time and should come into fruition in due course.

Resistance levels:

  • 1.1500
  • 100-day EMA (yellow)
  • 1.1400

Support levels:

  • 20/50-day EMA (purple/blue)
  • 1.1186

IG CLIENT SENTIMENT DATA UNSURE

IGCS shows retail traders are currently marginally long on EUR/USD, with 56% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but the fact that traders are positioned roughly equally, there is currently no preferred directional bias.

image.png

 

Jan 18, 2022 |  Warren Venketas, Analyst. DailyFX

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