US Dollar on the Front Foot

Fed Signals Sooner-Than-Expected Tapering

The US Dollar Index (DXY) gave back some gains on Monday and slipped to 92.115 from a 92.405 high reached Friday on the back of a surprise hawkish switch by the Fed. The dollar jumped almost 2.0% last week (which marks the biggest gain since March of 2020), as investors rushed to capitalize on a sooner-than-expected tapering of the monetary stimulus.

During Wednesday’s meeting, last week the Fed projected that the first post-pandemic rate hike will come as soon as 2023 but officials promised to maintain a supportive policy for the time being. The EUR/USD dropped to a low of 1.1847 last week, from a high of 1.2147, and is trading at 1.1890 at the time of writing. The week ahead is sprinkled with testimonies and data releases for both the Euro and the US Dollar, which could set the tone for the medium-term movement.

Key Events for the Week Ahead

Today at 2:15 pm GMT, ECB President Lagarde will testify before the European Parliament Economic and Monetary Affairs Committee. As always when heads of central banks speak, volatility may increase, but the impact is hard to gauge with accuracy, thus caution is advised.

Tuesday, June 22, Fed Chair Jerome Powell will testify before the House Select Subcommittee on the Coronavirus Crisis, on the topic of the emergency lending programs and other policies of the Fed. Depending on the Chair’s attitude and answers, we may see some strong moves on the US Dollar pairs, but the market may as well have a muted reaction if everything goes smoothly.

Wednesday, June 23 we take a look at Manufacturing And Services data for both the euro and the dollar: the German Flash Manufacturing and Services PMIs will come out at 7:30 am GMT, expected to show readings of 63.0 and 55.4, respectively. The U.S. Manufacturing and Services PMIs will come out later in the day, at 1:45 pm GMT, with a forecast of 61.5 and 70.0, respectively. These are leading indicators of economic health, with a hefty impact on the country’s currency; higher numbers show economic expansion.

Technical Outlook – EUR/USD

Last week’s dollar strength took the pair deep below the 50 days Moving Average and shattered the support at 1.1970 but now the RSI is indicating an oversold condition and price seems to react to a long-term bearish trend line.

Today’s climb is small compared to last week’s huge drop, and it’s clear that short-term control belongs to the bears but oftentimes, strong moves in one direction are followed by counter moves (pullbacks). If such a pullback occurs, the first resistance is located in the 1.1970 area but if the pair moves below the bearish trend line, we will probably see a continued move that will have 1.1700 as the target.