The ‘sell the fact’ trade following Macron’s victory in the second round of the French elections saw the EUR/USD drop from 1.1021 to 1.0921 levels on Tuesday.
The bearish action completely engulfed the Friday’s positive price action. Bearish engulfing candle, especially when it appears at market tops, suggests indecision/trend reversal.
The currency pair traded in the sideways manner in Asia above the 10-DMA level of 1.0922.
Treasury yields at one-month high
The focus remains on the 10-year treasury yield, which clocked a one-month high of 2.392% on Monday. Meanwhile, the 2-year yield, which tracks the short-term rate rise/inflation expectations, remains around the 1-1/2 month high of 1.342%.
Fed policy makers continue to sound hawkish with consensus built on the need to push rates higher. The policymakers also seem to agree that the process of the balance sheet normalization could begin this year.
Fed intends to build an ammo stockpile
The need to normalize policy is now more about creating wiggle room and less due to strong economy. The Fed intends to push rates higher so there is room to respond to the next recession / slowdown with rate cuts. More importantly offloading bond holdings would create room for the Fed to initiate fresh purchase program if and when required.
Focus on Fed speak
Fed’s Rosengren, due to speak later today, is likely to sound hawkish and that would only strengthen the bid tone around the US dollar. The German industrial production and trade data due in early Europe is unlikely to move the EUR pairs.
EUR/USD Technical Levels
A failure to hold above 1.0922 (10-DMA) would expose 1.0875 (May 4 high). A daily close below the same would add credence to Monday’s bearish engulfing candle and shall open doors for a potential break below the 200-DMA level of 1.0836.
On the higher side, a break above 1.0943 (5-DMA) would expose Monday’s high of 1.1021. A daily close above the same would signal continuation of the rally from 1.0569 (Apr 10 low) and could yield 1.11 (zero levels).