The US Dollar closed higher yesterday, while the Euro held below 1.0500, because Christine Lagarde did not give a new discourse regarding the European Central Bank’s monetary policy. The Euro moved lower against the USD after Lagarde said that the ECB may be moving gradually, but with some choice of actions to adjust to developments in the medium-term inflation rate, especially if there are signs of weakening inflation.
The ECB is expected to follow other central banks’ steps by raising interest rates in July to tackle soaring inflation, although the magnitude of the increase is not yet known with certainty.
EURUSD on Wednesday fell by -0.75% to a 1-week low as lower European government bond yields weakened euro rate differentials. The yield on German 10-year bonds fell -10.9 bp on Wednesday to 1.519% after Germany’s June CPI unexpectedly eased. A drop in eurozone economic confidence in June to a 15-month low also weakened the EURUSD.
The USDIndex, which scored a two-decade high of 105.54 this month, closed up 0.56% at the 104.83 area in trading on Wednesday. The Dollar advanced moderately and posted 1-1/2 week highs. Hawkish comments from Fed Chair Powell and Cleveland Fed President Mester supported the Dollar. Also, the Yen slumped to a fresh 23-year low against the Dollar, weighed by the different central bank policies. The negative factor for the Dollar was the unexpected downward revision to Q1 GDP.
Fed Chair Powell said that the US economy is in a strong state and overall in a good position to withstand tighter monetary policy. Cleveland Fed President Mester said central bankers should not rest on their laurels about rising long-term inflation expectations and should be firm in taking action to lower inflation. She added that she would like to see the fed funds rate hit 3.0% to 3.5% this year and slightly above 4% next year to control price pressures. At a different pulpit, New York Fed President John Williams said in an interview with CNBC yesterday that interest rates should absolutely be between 3 and 3.5% by the end of this year, but he said this does not take a recession into account.
US Q1 GDP was unexpectedly revised down to -1.6% (y/y), weaker than the expected -1.5% and the steepest pace of contraction since Q2 2020. Q1 personal consumption rose +1.8%, weaker than the expected +3.1 %. The Q1 core PCE deflator was up +5.2% q/q, stronger than the expected +5.1% q/q.
EURCHF’s decline continues today, reaching 0.9964 so far. The intraday bias remains on the downside, and a continued move below the 0.9971 support should continue the larger downtrend. The next test of the level is likely to fall at the 0.9649 figure long term projection of the Fibonacci pullback expansion 1.2005-1.0503 and 1.1151.
However, on the upside, a move above the 1.0217 minor resistance would delay the bearish case and turn the bias back to the upside for a first rebound. All technical indicators validate the price movement to the downside.