A week's FOMC meeting may prove to have been a watershed moment for EUR/USD. It is now even more evident that the Federal Reserve's rate-setting committee is much more hawkish than the ECB's, and that will likely weaken EUR/USD further in the weeks ahead.
In the short term, EUR/USD could drop some more as traders that have changed from short to long spans are pressured into liquidating those longs since the markets digest affirmation that the Fed will almost surely tighten monetary policy faster than the ECB within this cycle.
Last Wednesday's meeting of the Federal Open Market Committee, which determines on US financial policy, looks to have ushered in a new age of EUR/USD weakness -- apparently providing confirmation that the FOMC will tighten policy in this cycle nicely before the European Central Bank's more dovish rate-setting Governing Council.
The Fed employs a so-called scatter plot to signal its expectations of future fluctuations in US interest rates, with every single member of the FOMC represented by one dot. That currently points to the Fed raising rates twice by the end of 2023. By contrast, the ECB is still denying that policy should remain loose. Really, its Chief Economist Philip Lane insisted only the day following the FOMC meeting it is still early and unnecessary to explore the end of the Eurozone central bank's emergency bond-buying program.
From a long-term perspective, this has shifted the prognosis for EUR/USD even if the Fed has signaled only a slightly faster tightening cycle than before, and also a new tendency lower looks to have begun .
As the chart above shows, the 1.2266 level touched on May 25 now seems to have been a significant high, together with the steep drops on Wednesday and Thursday confirming that further losses are on the way. Even in the long run it is not yet apparent that the post-Fed selling is finished, with the 14-day relative strength index in the bottom of the graph not yet considerably below the 30 indicate that points to an abysmal advantage.
Note also that info onto the positioning of traders using IG's platforms revealed a sharp move from short to long not simply in the 24 hours after the Fed's announcement but week-on-week too. As listeners into my weekly webinar will know already, at DailyFX we have a contrarian perspective of retail trader sentiment and these positioning changes are therefore another negative for EUR/USD.
WEEK AHEAD: PMIS, IFO AND CONFIDENCE DATA
Against this history, inflation figures will remain the focus of attention in the weeks ahead as we wait to see if it demonstrates"transitory" or persistent -- the latter meaning rates might have to rise far faster than currently priced in. There are none due from the major EU states this week but it's a busy week for Eurozone sentiment data, kicking off Tuesday with the flash customer confidence amount for June.
That is accompanied by flash purchasing managers' indexes Wednesday, the German Ifo business climate indicator and French business confidence Thursday, and the GfK step of German consumer confidence Friday. Additionally, a European Council meeting starts Thursday, when EU leaders will meet in Brussels to talk about Covid-19, economic recovery, migration and external relations, such as relations with Turkey and Russia.