Stock markets have taken a step back from recent highs, and the currency market is seeing some strengthening of the dollar ahead of the Fed meeting later Wednesday.
Interestingly, EURUSD has been predominantly declining for the last three weeks but found support near the 50day moving average around 1.2100 so far this week. Additionally, there is a 73.4 Fibonacci retracement of the rally from April to the highs of May near this level. Thus, the bulls are in no hurry to give up this defensive line, intending to stay within the upward trend in the pair.
Therefore, the recent pullback might be a step back to recharge the bulls strength before hitting new highs. This has been our central scenario for a long time, but its relevance has diminished considering the new fundamentals.
Earlier this year, EURUSD came under pressure due to the everincreasing difference in growth rates between the US and Eurozone due to the scale of vaccination and support packages that were higher in the US.
Last week the ECB provided the euro with another reason to lag, announcing that it was too early to discuss winding down support and that the current programmes will be executed at a higher pace in the summer, which was picked up in the second quarter.
Todays relevant question is what stance the Fed is taking, which is the main reason why markets are nervous. The inflation rate and the extent of free liquidity in the US financial system are at levels where the Fed is expected to tighten…