- EUR/USD recovered its four-week low at 1.0740 as the USD index showed significant strength amid cautious market sentiment.
- Federal Reserve policymakers have pushed for a pause in interest rate hikes at the May meeting due to banking turmoil.
- The European Central Bank’s higher interest rates in the Eurozone are having disastrous effects on its economic prospects.
- EUR/USD kissed the 61.8% Fibonacci retracement at 1.0738.
EUR/USD printed a fresh four-week low at 1.0740 in the Asian session. The major currency pair faced huge selling pressure as market sentiment remained cautious. Market sentiment has turned negative as investors fear that if the delay on the US debt ceiling issues continues, the US economy would be forced to default on mandatory payments.
S&P500 futures are holding on to significant gains made in early Tokyo, led by dovish notes from the Federal Open Market Committee (FOMC). Most Federal Reserve (Fed) policymakers expect a temporary pause in the policy tightening period due to tight lending conditions from regional US banks. However, overall market sentiment would remain risk-averse until the White House and the Republican leader reach a bipartisan deal.
The American dollar The index (DXY) quickly climbed above 104.00, resuming its two-month high as it improved its appeal as a failure of the US economy due to opposition to raising the US debt ceiling would have disastrous consequences. Meanwhile, fears of a US bankruptcy further weakened demand for the US government bonds. This led to a significant jump in 10-year US Treasury yields above 3.74%.
No June rate hike by the Federal Reserve appears certain
After 10 consecutive waves of interest rate hikes by the Federal Reserve, the odds of a break in the rate hike spree have increased sharply. Edition FOMC minutes late Wednesday indicated that several Federal Reserve policymakers were advocating that a rate hike at the May meeting be followed by a pause due to banking turmoil.
Bankruptcies declared by various US banks have forced regional banks to tighten their lending conditions significantly to avoid the accumulation of non-performing assets (NPAs). This led to a serious decline in loan disbursements to households and businesses. In a speech last week, Federal Reserve Chairman Jerome Powell also advocated a pause in rate hikes as the increase in banks’ lending filters weighed heavily on inflationary pressures.
US durable goods orders take center stage
Following the release of the dovish DOMC minutes, investors are shifting their focus towards the release of US durable goods orders data due on Friday. April durable goods orders fell 1.0% vs. expansion of 3.2%. The cut in economic data suggests weak demand, which would have a knock-on effect on the US Consumer Price Index (CPI).
Investors should note that the US economy faces the challenges of persistent core inflation more than the headline price index. A reduction in demand for durable goods would take some of the heat out of core inflation and be more of a comforting factor for the Federal Reserve.
The Eurozone is nearing stagnation due to higher interest rates
Higher interest rates according to European Central Bank (ECB) in eurozone have disastrous effects on its economic prospects. The manufacturing sector is facing extreme heat and is showing strong contraction. Analysts at Commerzbank said: “PMIs are already suggesting that the European Central Bank’s rate hikes will hit the eurozone economy at some point. This means that the doves on the European Central Bank board may gain the upper hand at some stage, at which point the euro would lose important support.
Economist Klaus Wohlrabe also said in Germany’s IFO Business Survey that “the German economy is headed for stagnation in the 2nd quarter as higher interest rates dampen overall demand.
EUR/USD Technical Outlook
EUR/USD crossed 61.8% Fibonacci retracements (plotted from March 15 low at 1.0516 to April 26 high at 1.1095) to 1.0738 on the four-hour scale. The 20-time exponential moving average (EMA) at 1.0780 acts as a strong barrier for Euro bulls.
The Relative Strength Index (RSI) (14) is oscillating in a bearish range of 20.00-40.00, indicating continuation of bearish momentum.