EURO FORECAST:
- U.S. Treasury yields corrected lower in May, but have resumed their ascent. This may complicate the euro[1]’s recovery
- May U.S. jobs numbers could help cement expectations of another 50 bps Fed hike in September if data show the labor market continues to tighten
- This article looks at EUR/USD[2] key technical levels to keep an eye on in the near term
Most Read: Euro Finds Support but Downside Risks Remain[3]
U.S. Treasury yields began a moderate correction in early May on speculation that weakening U.S. economic activity would lead the FOMC[4] to slow its aggressive tightening cycle over the forecast horizon. The pullback in rates accelerated later in the month after Atlanta’s Fed President, Raphael Bostic, a non-voting member of the central bank, signaled policymakers could potentially pause interest-rate increases in September. Against this backdrop, the DXY[5] index posted a sharp decline from its 2022 high recently, boosting the euro and other currencies, but the weakness may begin to reverse soon.
In any case, the outlook for monetary policy will likely be the most important catalyst for markets in the coming months. While expectations may change, traders are increasingly convinced that the Federal Reserve will not veer off course, but press ahead with the strategy to front-load hikes in the near term.
After the 50 basis points adjustment in May[6], Wall Street[7] assumed that the Fed would continue to raise borrowing costs at that pace in June and July, but then return to the standard 25 bp move at subsequent meetings. Now, however, bets are increasing that the bank will deliver another half a percentage point hike in September, with traders assigning a 64% probability to that
