The EUR/USD managed to bounce off its earlier lows as US traders entered the fray, ahead of the publication of FOMC minutes later on. The single currency had initially sold off along with European stocks and commodity dollar. But thanks to ongoing hawkish rhetoric from the ECB, traders were happy to buy the dip this time. A close above 1.0850 would enhance the EUR/USD forecast for the bulls from a technical point of view. But on a macro front, all eyes remain firmly fixated on the US debt limit situation and poor risk appetite.
Risk appetite sours
Risk appetite soured further in the first half of Wednesday’s session. We saw a sharp sell-off in European stock markets, causing US futures to decline. Sentiment has been hurt because of various reasons, but top of the list are concerns about the health of the Chinese and European economies and fears about the US debt ceiling. You also have a Fed still keen to tighten its policy further, while inflation in some parts of the world continues to remain very high, causing all sorts of problems and hurting the pockets of consumers. For example, the UK CPI eased less than expected to a still very high 8.7% in April. Businesses are not doing very well either, especially in the manufacturing sector, as we found out on Tuesday with those weak PMI numbers.
Luxury stocks, copper and Chinese stocks sink
Unsurprisingly, we saw a sharp drop in shares of Europe’s top luxury brands on Wednesday morning, including Herms, LVMH and Kering, among others. This came on the back of a fresh drop in Chinese shares to a new low for the year. The selling meant the German DAX had now relinquished the entire sharp gains from last week in the space of just three days. Copper, too, hit a new low for the year, hurt by concerns about demand from China, the world’s top importers of base metals (and many other commodities).
NZD leads commodity dollars drop
The risk off sentiment also filtered through the FX markets, causing commodity dollars to sink. Overnight the RBNZ hiked interest rate by 25 basis points, but the central bank also indicated that it is done with hiking, and this cause the NZD to drop sharply as traders priced out further rate hikes. The kiwi also took a hit because of the risk off trade weighing on all commodity dollars.
However, it wasn’t just ComDolls that struggled against the greenback. The pound and euro also fell, albeit the losses were contained. This morning saw inflation data come in stronger from the UK but this failed to provide any meaningful support for the GBP/USD, with the cable turning lower shortly after to drop to a new low on the week
EUR/USD forecast: Key level to watch is 1.0850
The EUR/USD also can’t seem to catch any meaningful bid, despite ongoing hawkish ECB commentary. Lagarde was at it again earlier this week, saying while the ECB has covered a large chunk of the journey towards taming inflation, they are “not done yet” with policy tightening because the inflation outlook is “too high and for too long”. However, the EUR/USD sold off anyway, thanks to a strengthening US dollar and weakness in Eurozone data. The manufacturing PMIs were rather weak, adding to a growing list of below-forecast data releases recently, all suggesting that growth is losing momentum. This morning’s main Eurozone data release was the German ifo Business Climate, which fell more than expected to 9.17 from 93.4.
So, the US dollar remains king of FX markets, finding support because of the ongoing “risk off” sentiment and hawkish Fed talk, ahead of FOMC minutes later today. Will that change later today remains to be seen. But at the time of writing, the EUR/USD was finding some love as it bounced about 50 pips from the 1.0750ish support level. For confirmation that it has formed a low, we still need to see a rise above 1.0850. Otherwise, the EUR/USD forecast remains bearish on the lower time frames.
-- Written by Fawad Razaqzada, Market Analyst