The shift in the Fed’s approach is undoubtedly significant and justified a large move in the dollar. EUR/USD is already more than 200 pips below pre-decision levels. However, it is time for a correction.
Yields reverse course
“In the past few months, the dollar’s moves have been correlated with returns on US Treasury yields. In response to the Fed, 10-year bond yields leaped by some 10 basis points to 1.59%, maintaining that correlation. However, they have been drifting lower since then, standing at below 1.51% at the time of writing. The dollar is set to catch up with the bond market.”
Weekend repositioning
“Forex trading is 24/5, not 24/7. Investors will likely take dollar profits and clear positions ahead of the weekend. After such a sharp move – atypical for euro/dollar in recent months – there is room for an upswing. Moreover, markets may begin looking ahead and remember that the Fed is not the only game in town. Europe’s rapid vaccination rate is a plus for the common currency.”
EUR/USD is oversold
“The Relative Strength Index (RSI) is well below 30 – deep in oversold territory. That can last for some time, but not forever. After spending a day in the red, there is room for recovery.”
“Support awaits at 1.1891, which was the bottom on Thursday and the lowest since mid-April. Further down, 1.1860 provided support back then. Resistance is at 1.1925, Friday’s high so far, followed by 1.1950, a cushion from April. The next caps are 1.1980 and 1.2010.”