5 Reasons Why EUR/USD Soared to 7 Week Highs on FOMC

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5 Reasons Why EUR/USD Soared to 7 Week Highs on FOMC

Daily FX Market Roundup 04.28.2021

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

EUR/USD soared to 7 month highs today for the following reasons:

1. Fed failed to live up to expectations. Says now is not the time to talk taper
2. German 10 year bund yields hit 2 month highs
3. Improvements expected in Thursday’s German labor market and EZ confidence numbers
4. With 7 weeks until next Fed meeting, restrictions will ease in EZ before Fed talks tightening
5. Technically, EUR/USD breaks to upside

The Federal Reserve failed to live up to expectations resulting in broad based losses for the U.S. dollar. The greenback traded lower against all of the major currencies and this weakness pushed EUR/USD to strongest level in nearly two months. According to the FOMC statement, economic activity and employment strengthened thanks to progress on vaccines and strong policy support. With business activity gaining traction, their optimism was widely anticipated. Investors were also hoping that recent improvements would encourage Fed Chairman Powell to hint about tapering but he didn’t take the bait. Instead, Powell emphasized that the increase in inflation is transitory because there’s still significant slack in the labor market. “A transitory rise above 2% inflation this year wouldn’t meet standard of moderate overshoot.” Instead of staying mum on balance sheet changes, Powell said now is not the time to start talking about taper, which was all that investors needed to hear to send the dollar tumbling lower. The greenback sold off across the board and with 7 weeks until the next policy meeting, the Fed’s reluctance to reduce accommodation could keep the dollar from rallying in the near term.

FOMC was not the only reason why EUR/USD catapulted higher on Wednesday, though it was certainly the most important. German 10 year bund yields also hit a 2 month high and tomorrow, we are looking for stronger German labor market and Eurozone consumer confidence numbers. Inflation data should also be hotter with commodity prices on the rise. Time is on Europe’s side. More Europeans are getting vaccinated every day and in May restrictions could ease. When that happens the prospect of robust demand should drive renewed gains in euros. On a technical basis the 20/50-day SMA cross is a signal of further strength.

President Biden addresses Congress tonight on the eve of his 100th day in office. He is expected to unveil a $1.8 trillion packaged focused on supporting families and education. This new package is part of the President’s $4 trillion spending plan funded with tax reform. The top marginal rate for the wealthiest Americans will increase along with taxes on capital gains for anyone earning more than a million. The rally in stocks has been moderated by the prospect of higher taxes and Biden’s speech could renew the market’s concerns.

Aside from Biden, Thursday’s first quarter U.S. GDP report will also be in focus. The U.S. economy is expected to come back strongly in Q1. Economists are looking for 6.1 percent growth – if the GDP numbers exceed that, we could see a bump up in the dollar. However if it falls short, the decline for the dollar against the Japanese Yen and other currencies could be more significant because it reinforces concerns about taxes, Fed disappointment and current market sentiment.

All of the commodity currencies traded higher on the back of U.S. dollar weakness. The New Zealand dollar led the gains ahead of tonight’s trade balance report. Given the rise in manufacturing PMI, trade data should be stronger. The Canadian dollar’s rally was supported by stronger retail sales but the Australian dollar lagged behind after CPI growth fell short of expectations.

Kathy Lien
Managing Director

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