Latest EUR weakness, while in conflict with our week-ahead view for a stable currency, is in-line with the ongoing move in short-term interest rates.
Chasing its rate-spread counterpart, this EUR/USD move lower suggests investors may be finally turning against the Fed’s still consistent message. Perhaps predictably, equity market appear more reluctant, and thus warn it may still be premature to read too much into the latest 48 hours market price action.
Equally however, that the break lower in EUR/USD has occurred in response to Tuesday’s Yellen testimony, indicates a growing number of investors may be willing to pre-empt the Fed –something many have been wary to do previously.
Perhaps the litmus test for a more meaningful USD reversal will be a test of EUR/USD’s June low (1.3503) today. Should we move through this level, perhaps alongside a begrudging reversal in equity markets, then we will begin to consider the possibility that a more volatile summer lies ahead.
CA