Central Bank speakers undermine EUR/USD

After a sharp rise in yields during the first two weeks of January, US interest rate markets remain front and centre. In yesterday’s article, we noted the efforts of four Fed officials to ease worries that the Fed may soon begin to commence tapering.

FOREX 7

This highlights policymaker's sensitivity to rising rates and their determination to keep rates pinned at ultra-low levels for an extended period. Which makes comments by the Federal Reserve Vice Chair Clarida during a speech late in the New York Session all the more baffling.

Clarida said that the Fed will not hike rates until inflation gets to “2% for a year”.

While some have welcomed the guidance that this statement provides it would pay to remember that the Feds preferred measure of inflation, Core PCE is currently near 1.4%. It could easily reach 2% in coming months as pent up demand is released upon the arrival of warmer weather and as the vaccine rollout reaches more people.

Whether Clarida’s statement will be corrected in coming sessions remains to be seen. However, the EUR/USD does not appear to be taking any chances as it eased back below 1.2200 overnight, already on the back foot after ECB President Lagarde again noted the ECB is monitoring exchange rate movements very carefully.

The chart below shows the recent pullback has created technical damage to the uptrend following the EUR/USD’s fall below the trendline support at 1.2250, coming from the November 1.1602 low.

From here, a break/close below near-term support 1.2130/10ish would warn the next leg lower of the pullback towards medium-term support 1.2050/00 is unfolding. Providing the pullback displays corrective qualities and signs of stabilisation emerge near 1.2000, it will be viewed as a buying opportunity, in anticipation of the EUR/USD uptrend resuming.

Keeping in mind, should the EUR/USD break and close below 1.2000ish, it would negate the medium-term bullish bias and warn that a deeper pullback is unfolding.  

Central Bank speakers undermine EUR/USD

Source Tradingview. The figures stated areas of the 14th of January 2021. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.