Daily updates on foreign exchange news

EURUSD price marches towards 1.0300 as ECB-Fed divergence to trim further

EURUSD price is displaying a sheer upside move after picking bids below 1.0200 in the late New York session. The pair displayed wild moves on Thursday after the European Central Bank (ECB) came forward with 50 basis points (bps) interest rate hike. The asset printed a fresh three-week high of 1.0277 and is expected to reclaim again. Broadly, the major has turned sideways and is auctioning in a wide range of 1.0153-1.0277 from the past three trading sessions.

The US dollar index (DXY) has surrendered the cushion of 107.00 completely after failing to sustain above 107.30 on Thursday. On a broader note, the asset is consolidating in a wide range of 106.40-107.33 and is eyeing a fresh downside impulsive wave with a downside break. It is worth noting that the asset has displayed volatility contraction after a sheer downside move from a high of 109.30, recorded last week. Now, the ongoing process of inventory distribution will unfold the downside potential

Introduction of TPI to support Southern Europe
ECB President Christine Lagarde came with plenty of surprises on Thursday. Other than the interest rate hike by 50 bps, the introduction of the Transmission protection Instrument (TPI) to support southern European economies was not expected. The announcement of higher interest rates may be fruitful for core European Union (EU) members such as Germany and France due to their stable financial position. However, southern European economies such as Italy, Greece, and Spain that are facing financial instability may face more headwinds due to higher borrowing costs.

Therefore, the ECB has introduced a new fragmented tool under which the ECB will purchase public securities of these countries and also private securities, if required, to support them against unwarranted deterioration in financing conditions. The public securities would have a maturity between 1 to 10 years.

ECB is unable to determine a neutral rate for now
EURUSD price vapored its optimism early on Thursday after ECB Lagarde didn’t lay down a crisp framework for neutral rates that would keep inflation near its standards. Price pressures have soared in eurozone as a figure of 8.6% for an overall inflation rate is sufficient to annoy households. It looks like the ECB has still not crunched out how far price pressures can go, which has paused them to derive neutral rates for lending operations.

Focus shifts to Fed
EURUSD price is likely to find further direction from the monetary policy announcement by the Federal Reserve (Fed), which is due next week. As a slippage in long-run inflation expectations ruined the odds of a rate hike by 100 bps, an interest rate decision by 75 bps is still on the cards. No doubt, the decision will accelerate the Fed-ECB policy divergence further in absolute terms. But relative mathematics in Fed-ECB policy divergence will calm down as ECB has just started hiking its interest rates.

DXY sees a bumpy ride on firmer Wall Street
The DXY surrendered its optimism on Thursday after the second quarter show by the US companies delighted with the better-than-expected earnings from Tesla. Wall Street remained firmer led by upbeat results from Tesla and a stellar performance by tech companies. This improved the risk appetite of the market participants and the safe haven lost its appeal. The DXY is looking bearish now and is expected to extend its losses after slipping below Wednesday’s low at 106.39.

EURUSD technical analysis
EURUSD price is forming a Bullish Flag on a four-hour scale that signals a continuation of bullish momentum after a rangebound phase. Usually, a consolidation phase denotes intensive buying interest from the market participants, which prefer to enter an auction after the establishment of the trend.

The shared currency bulls have successfully defended the 20-period Exponential Moving Averages (EMA) a few times around 1.01720, which adds to the upside filters.

Meanwhile, the Relative Strength Index (RSI) (14) is attempting to shift into the bullish range of 60.00-80.00. An occurrence of the same will infuse fresh blood into the shared currency bulls.

A breach of Thursday’s high at 1.0278 will drive the asset towards the round-level resistance at 1.0300, followed by July 1 low at 1.0366.

Alternatively, the greenback bulls could gain control if the asset drops below Monday’s low at 1.0081.  An occurrence of the same will drag the asset towards the psychological support at 1.0000. A breach of the psychological support will expose the greenback bulls to recapture its two-year low at 0.9952.

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