EUR/USD has retreated from the highs after US yields resumed their gains. All eyes are now on Jerome Powell, Chair of the Federal Reserve, who testifies before Congress later in the day and may propel the euro higher. Meanwhile, the technical picture looks bullish, FXStreet’s Analyst Yohay Elam briefs. 

Key quotes

“Fed Chair Powell testifies before Congress and markets are eagerly awaiting his comments on the Fed’s bond-buying scheme. Does the bank continue seeing the current increase in yields as a healthy sign of vaccine-led growth down the road? Dismissing these recent moves would hurt stocks, which need low-interest rates to thrive. On the other hand, if Powell says the Fed is ready to push yields lower, concerns of overheating and inflation may cause the bank a new headache.”

“Erring on the side of caution will likely push the greenback lower, allowing EUR/USD to hit new highs. However, even Powell’s power has its limits.”

“Euro/dollar is benefiting from significant upside momentum on the 4-hour chart and trades above the 50, 100 and 200 Simple Moving Averages. Moreover, the Relative Strength Index is below 70, outside overbought conditions.” 

“Resistance awaits at the daily high of 1.2180, followed closely by 1.2190, a peak earlier in the year, and then 1.2220.”

“Support is at the daily low of 1.2140, followed by 1.2110, which is a separator of ranges and also where the 50 and 200 SMAs hit the price.”

US equities markets have continued to perform well, fueled by upbeat earnings and vaccination news. However, that’s often when surprises arise. A correction would be welcome at this point, as sentiment and positioning have reached extreme levels, as Mike Wilson, Chief Investment Officer and Chief US Equity Strategist for Morgan Stanley notes.

Key quotes

“Fourth quarter earnings proved to be terrific for most companies. With 419 companies in the S&P 500 reporting so far, earnings per share have come in 18% higher than the consensus estimate. Sales have been just 3% higher on average, suggesting our operating leverage theme is really playing out. Fourth quarter sales actually grew 1% year over year. When combined with a lower unemployment cost and other operating expenses, profit margins have moved to near all-time highs. In short, the recession is over for corporate profits.”

“After a slow start, the vaccination process has picked up nicely. In addition, there is some evidence that the first shot of the vaccine could provide 75% effectiveness against symptoms of any kind. Meanwhile, new cases are falling more rapidly than expected, and several leading health experts are even saying we may achieve herd immunity as early as April.”

“At this point, it seems like nothing can slow this bull market. However, that’s exactly when surprises usually arise. We see two potential risks to be thinking about as we exit February. First, is the risk associated with interest rates rising sharply as bond markets simply catch up to what other asset prices are already reflecting. Second is the risk that some of the positive operating leverage that we’ve been witnessing in company earnings reports starts to go in reverse.”

“With this macro backdrop, we continue to favor areas in the market that are reasonably priced or can benefit from rising rates and inflation. Areas like banks, materials and energy. We also favor reopening beneficiaries in the consumer and business services sectors, as markets begin to digest a faster return to normal activities.”

British Prime Minister Boris Johnson said on Tuesday that he is very optimistic that England will fully re-open on June 21 but added that it’s not a guarantee. 

Johnson further noted that there are deep and complex issues to explore around the vaccine certification while saying that it’s can’t be discriminatory. “British Cabinet Minister Michael Gove will review the use of vaccine certification,” the PM added. 

Market reaction

The UK’s FTSE 100 Index showed no immediate reaction to these remarks and was last seen losing 0.45% on a daily basis at 6,582.

The data from the UK showed on Tuesday that the Confederation of British Industry’s (CBI) Retail Sales Balance in February rose to -45 from -50 in January. This reading came in worse than the market expectation of -38.

Commenting on the data, “with lockdown measures still in place, trading conditions remain extremely difficult for retailers,” said Ben Jones, principal economist at the CBI, as reported by Reuters. “Record growth in internet shopping suggests that retailers’ investments in on-line platforms and click-and-collect services may be paying off, but the re-opening of the sector can’t come soon enough to protect jobs and breathe life back into the sector.”

Market reaction

The GBP/USD pair edged slightly lower after this report and was last seen gaining 0.13% on the day at 1.4080.

The USD/JPY pair is recovering from an intraday low of 104.92, trading around 105.30. USD/JPY has limited bullish potential and needs to advance beyond 105.60 to gain upside traction, Valeria Bednarik, Chief Analyst at FXStreet, reports.

Key quotes

“In the US, the focus will be on the Federal Reserve chief Jerome Powell, who will testify before Congress for the first time in the Biden era. The Semiannual Monetary Policy Report may include hints on the future of QE. Powell’s prepared remarks will be released ahead of his speech.”

“USD/JPY has a limited bullish scope in the near-term. The advance could gather momentum if the pair surpasses the 105.60 level.”

• NZD/USD is fluctuating in a relatively tight range on Tuesday.
• US Dollar Index is posting modest daily gains above 90.00.
• Investors await FOMC Chairman Jerome Powell’s testimony at 1500 GMT.

The NZD/USD pair closed the third straight day in the positive territory and touched its highest level since April 2018 at 0.7345 on Monday. With the trading action turning subdued on Tuesday, the pair seems to have gone into a consolidation phase and was last seen losing 0.11% on the day at 0.7320.

USD selloff takes a break ahead of Powell’s testimony

The broad-based selling pressure surrounding the greenback provided a boost to NZD/USD at the start of the week. The US Dollar Index (DXY) dropped below 90.00 for the first time in more than a month during the Asian trading hours on Tuesday but staged a modest rebound. At the moment, the DXY is up 0.13% at 90.13.

Later in the day, the Conference Board’s Consumer Confidence Index and the Federal Reserve Bank of Richmond’s Manufacturing Index will be looked upon for fresh impetus.

More importantly, FOMC Chairman Jerome Powell’s semi-annual testimony before the Senate Banking Committee will be watched closely by market participants.

Powell’s comments on the latest upsurge witnessed in US Treasury bond yields and concerns over an uncontrolled increase in inflation could ramp up the volatility in the second half of the day. If Powell downplays inflation worries and reaffirms the Fed’s dovish stance, the greenback could have a tough time finding demand and allow NZD/USD to regain its traction.

Technical levels to watch for