FX Trading focus: Squeeze on USD longs, ECB talks 50’s, Strong UK data
EURUSD was rising in general sympathy with a squeeze on USD longs as risk sentiment improved again overnight on hopes that China is softening its stance on tech companies. But the EUR jumped aggressively later in the session today after ECB governing council member Klaas Knot said that fifty basis point hikes should be on the table if conditions warrant. This took ECB rate tightening anticipation for this year over 10 basis points higher, with a positive 50 basis point policy rate almost fully priced now (47 bps of this writing). This is the second day in a row of hawkish talk from the ECB after Bank of France head Villeroy warned on the weak euro yesterday. That rate through the December ECB meeting has jumped some 20 basis points over the last two sessions and is 14 basis points above the prior peak from earlier this month of 33 bps. Premature to call a EURUSD bottom, as we have simultaneously seen a robust bounce off equity market lows of late last week that is likely at least as decisive factor in pricing USD pairs recently. More thoughts in the EURUSD commentary below. Tough to see the ECB moving 50 basis points unless the EURUSD is challenging parity suddenly or unless the bank pre-warned on such a move and positioned it as a quick front-running of ending NIRP rather than setting a precedent for further hikes of that size.
For the latest on the status of the USD rally, watching the US Apr. Retail Sales today and Fed Chair Powell out speaking later today in a WSJ-interview (as US gasoline prices hit a record high and the Fed has recently seemed to want to step back from driving the anticipated pace of tightening higher.)
EURUSD retook the important 1.0500 area intraday today, a level that was a clear sticking point on the way down. Watching the close today for whether the move sticks and if it does, it could point to a follow through into the next important resistance level at 1.0642, which is also near the 2020 low for the pair. A more profound reversal will take a significant further pull higher, well above 1.0800, so it is too early to discuss more than a tactical reversal. Also watching US data later today and importantly, ECB President Lagarde out speaking much later today.