Euro retreats below 1.1000 on USD bounce

Euro loses its shine and revisits the 1.0980 area.
Equities in Europe extend the negative streak so far this week.
EUR/USD retreats from monthly highs past the 1.1000 mark.
Fed Powell’s second testimony should keep the hawkish tone.
The USD Index (DXY) regains some composure following monthy lows.

After rising to new monthly highs above the important 1.1000 threshold against the US Dollar, the Euro (EUR) has lost some steam and retreated to the 1.0980 area, resulting in slight losses for the day thus far.

In a broader context, the potential future actions of both the Federal Reserve and the European Central Bank (ECB) regarding the normalization of their monetary policies continue to be a subject of debate. Additionally, there is growing speculation of an economic slowdown on both sides of the Atlantic.

Regarding the Fed, Chair Powell hinted that more measures are necessary to bring inflation back to the target of 2.0%, while also keeping the possibility of further tightening in the second half of the year open. Investors generally anticipate either two 25 basis point rate hikes or a single 50 basis point adjustment in the coming months.

Data-wise in Europe, the flash Consumer Confidence tracked by the European Commission improved a tad to -16.1 for the current month (from -17.4). In the US, Initial Jobless Claims rose by 264K in the week to June 17 and the Chicago Fed National Activity Index worsened to -0.15 in May. In addition, the CB Leading Index contracted 0.2% MoM in May and Existing Home Sales expanded 0.2% in May, or 4.3M units, vs. the previous month. Further events include speeches by FOMC members C. Waller (permanent voter, hawk), M. Bowman (permanent voter, centrist), L. Mester (2024 voter, hawk) from the Cleveland Fed, and T. Barkin (2024 voter, centrist) from the Richmond Fed.

Daily digest market movers: Euro comes under pressure following monthly peaks

The US Dollar rebounds from multi-week lows near 101.90 on Thursday.
Market participants expect no surprises at Powell’s second testimony.
Concerns around the Chinese recovery continue to weigh on sentiment.
Recession jitters resurface on the back of extra central banks' tightening.
The FX universe continues to monitor the ECB-Fed divergence.
The BoE unexpectedly hikes rates by 50 bps, feeding further recession concerns.

Technical Analysis: A visit to the 2023 peak appears likely

EUR/USD rebounded sharply and advanced to fresh monthly highs past 1.1000 on Wednesday. That said, once the pair clears the June top at 1.1012 (June 22) it could then pave the way for a subsequent challenge of the 2023 high of 1.1095 (April 26), ahead of the round level of 1.1100, and the weekly high of 1.1184 (March 31, 2022), which is supported by the 200-week SMA, currently at 1.1181.

In the event that the bears take control, initial support emerges at the weekly low of 1,0891 (June 20) prior to the temporary contention at the 55-day SMA at 1.0883. Should this level be breached, there are no significant support levels until the May low of 1.0635 (May 31), followed by the March low of 1.0516 (March 15) and the 2023 low of 1.0481 (January 6).

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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