• US Dollar extends gains late during the US session, adds to weekly gains.
  • Data helps US Dollar ahead of next week FOMC meeting.
  • EUR/USD down for the third-day in-a-row, back below the 20-day moving average.

The EUR/USD pair dropped further on Friday and reached at 1.1201 a fresh 1-week low. Then bounced modestly to the upside, and it was about to end the week hovering around 1.1210, 130 pips below last Friday’s close.

The Euro ended having the worst weekly performance since March; something little expected considering that it rallied on the previous one above crucial technical levels (including an uptrend line) and on top of 1.1300.

A stronger US Dollar drove the move lower on Friday. The DXY had the best day in months, rising from 97.00 back above 97.50. Retail sales data added momentum to the greenback that ended the week with a positive tone.

The game of monetary policy divergence will continue next week

During this week, financial markets stepped up expectations of Fed monetary easing (86% probability of a rate cut in July, and 93% probability of two rate cuts in 2019) to quell the negative impact of increasing headwinds (dim prospects of a short-term resolution of China-US trade conflict, and softer inflation and employment data in the US, despite better-than-expected control retail sales). Expectations of monetary easing extended also to the ECB (60% probability of a rate cut in 2019, and 78% in 2020) after the market-based long-term inflation expectations reached a new low (5y5y forward inflation swap 1.9%) and after dovish comments coming from ECB’s officials”, explained BBVA analysts.

Next week, in the US, the Federal Reserve will have its 2-day meeting. It would be interesting to see what the Fed says on Wednesday and if it offers decisive dovish signals amid increasing pressure. Such a move could weigh on the US Dollar. Analysts at Danske Bank expect a dovish policy shift, paving the way for a rate cut in July. “While we have a constructive US macro outlook, uncertainty has risen and, from a risk management perspective, we believe it makes more sense to ease monetary policy than to do nothing.

In Europe, next week key data includes PMIs and another relevant event related to monetary policy will be the ECB annual conference in Sintra (June 17-19). Draghi will speak on Monday.