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EUR/USD Rebounds from 14-Month Low

H.S. Borji
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EUR/USD Rebounds from 14-Month Low

The euro was under pressure on Tuesday, setting a fresh 14-month low against the US dollar before consolidating above 1.29 US, as a dearth of economic data kept investors speculating about monetary policy.

The euro-to-dollar exchange rate fell to an intraday low of 1.2860. The pair would subsequently consolidate at 1.2917, advancing 0.16 percent. Initial support is likely found at 1.2864. On the upside, resistance is ascending ta 1.2943.

The dollar was supported on Monday after the Federal Reserve Bank of San Francisco said investors may be underestimating how quickly interest rates will rise.

“An ongoing concern has been that the public might misconstrue the Fed’s forward guidance about future monetary policy and underappreciate the extent to which short-term interest rates may vary with future news about the economy,” said San Francisco Fed researchers Jens H.E. Christensen and Simon Kwan.

“Evidence based on surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants. The public also may be less uncertain about these forecasts than policymakers.”

The central bank, eager to unwind its record bond buying program in October, is considering raising interest rates sooner than initially forecast. Earlier this year Fed Chair Janet Yellen said the first rate hike could materialize six months after the end of quantitative easing. Although she later retracted her comments, the latest batches of economic data reinforce the view the central bank could cut interest rates in the early part of next year.

The US dollar index spiked on Monday and carried forward the momentum into Tuesday, where it gained 0.09 percent to 84.31.

Meanwhile, monetary policy expectations in the Eurozone are trending in the opposite direction, which has placed greater strain on the common currency. Last week the European Central Bank cut its target for the overnight rate for the third time in less than a year, as policymakers announced plans to purchase up to €500 billion in asset-backed securities.

Tensions in Eastern Europe have resulted in a fresh wave of sanctions against Russia. Moscow is reportedly considering a flight ban on Western airlines in response to the European Union’s latest measures, which are expected to be implemented soon.

The growing divide between East and West is already hampering Eurozone growth efforts. The currency union stagnated in the second quarter after Germany, its star economy, contracted for the first time since 2013.

In other trading, the euro rebounded against the British pound, as the EURGBP advanced 0.28 percent to 0.8029. In British data, industrial production rose 0.5 percent in July, which translated into an annual gain of 1.7 percent, official data revealed on Tuesday.

Separately, the National Institute of Economic and Social Research said the UK economy accelerated 0.6 in the three months through August.

The common currency took advantage of a slumping Japanese yen, which was pressured by news that its economy contracted faster than forecast in the second quarter. Japan’s annualized gross domestic product contracted 7.1 percent, official data revealed earlier in the week. A slumping Japanese economy has raised expectations the Bank of Japan would pursue additional easing measures to stimulate growth.

The EURJPY advanced 0.53 percent to 1.3744.

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