Fed June rate hike odds drop, Will EUR/USD test 1.12?

The heightened political uncertainty in the US has taken a toll on the June Fed rate hike odds. The EUR/USD pair clocked a fresh six-month high of 1.1172 in Asia. 

A week back, the probability of a 25 basis point rate hike in June stood near 90%. As of now, the probability stands at 64%. Fed usually hikes rates only if the market puts the probability of the move at least above 60%. This was the Fed ensures the move is well priced-in and there are no unwanted side effects. Another round of sell-off in the USD could be seen if the probability dips below 60%.

Focus on the ECB minutes

As discussed in the article yesterday, the Eurozone economy is firing on all cylinders and the region is looking relatively stable on the political front as well. Thus, investors would scan the minutes of the latest ECB meeting for clues regarding the timing of the QE taper/rate hike.

The rally in the EUR/USD witnessed so far is largely due to the unwinding of the Trump trade - switch from US assets to Eurozone assets. Hawkish sounding ECB minutes could easily add fuel to the fire and could yield a rally to 1.12 levels.

Trump travels

The only risk to the rally in the EUR/USD is a sudden change in the headlines, i.e. the focus may shift from the political turmoil to Trump’s foreign visits. Trump is set to visit Saudi Arabia later this week. The next stop would be Israel, Palestine, Rome and the Vatican.

The change of focus may open doors for a technical correction in the US dollar/pull back on the EUR/USD pair.

EUR/USD Technical Levels

The spot was last seen trading around 1.1155 levels. The immediate resistance is seen at 1.1172 (Asian session high). A break higher would expose 1.1202 (23.6% Fib retracement of May 2014 high - Jan 2017 low) and 1.1299 (Nov 2016 high).

On the lower side, breach of support at 1.1123 (Aug, Sep 2016 low) would open up downside towards 1.10 (zero figure). A break lower would signal a short-term top has been made and could yield 1.0951 (last month’s high) and 1.0853 (monthly 10-MA).