Euro remains near two-month lows with all eyes on US CPI release
- EU/USD edged up to the 1.1550 area but remains close to two-month lows at 1.1500.
- Escalating tensions in the Middle East are weighing on risk appetite on Wednesday.
- Markets are bracing for a hot US CPI report later in the day.
The Euro (EUR) ticks up for the third consecutive day against the US Dollar (USD) on Wednesday, but remains capped below a previous support zone at 1.1575, with the two-month lows, in the 1.1500 area, at hand. Investors remain reluctant to place large USD shorts amid geopolitical uncertainty and with the US Consumer Price Index (CPI) release on tap.
Market sentiment was hit on Wednesday as reports of US strikes on Iran’s defence and radar systems and retaliatory attacks by Tehran targeting US forces in Bahrain added pressure to an already fragile ceasefire. The market reaction, however, has been contained so far, with the US Dollar and Oil prices holding a moderately bearish tone.
The main focus on Wednesday is May’s US consumer inflation release, which is expected to show that inflationary pressures accelerated to three-year highs. These figures follow a bright Nonfarm Payrolls (NFP) report on Friday, setting the conditions for some monetary policy tightening by the Federal Reserve (Fed).
Technical Analysis: The Euro remains vulnerable below 1.1575
EUR/USD keeps hovering in a narrow range above 1.1505, highlighting the bearish near-term bias. Momentum is mildly negative, in 4-hour charts with the Relative Strength Index (RSI) hovering just below the 50 line and the Moving Average Convergence Divergence (MACD) indicator in shallow positive territory, which suggests downside pressure is easing but not yet strong enough to flip the structure.
Bulls would need to confirm above the previous tree weeks' range bottom, at 1.1575, to ease negative pressure and target the June 4 and 5 highs, around 1.1645, ahead of the late-May highs, at 1.1685.
On the downside, session lows are near 1.1530, although the key support is Monday's low at 1.1505, which aligns with April's trading floor. Further down, bears are likely to be tempted to test the March 30 low, at 1.1443.
(The technical analysis of this story was written with the help of an AI tool.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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