EUR/USD Price Falls Back To 1.0420 After ECB Emergency Meeting

Key Insights

• ECB will try to calm markets with an “anti-fragmentation” instrument aimed at limiting bond yields for weaker EU members. 
• Traders’ attention will shift to the upcoming Fed Interest Rate Decision, which will be released today. 
• If Powell is not hawkish enough, EUR/USD may get more support. 

EUR/USD Trades Near 1.0400 Ahead Of The Fed Interest Rate Decision

EUR/USD failed to settle above 1.0500 and moved closer to the 1.0400 level amid increased volatility ahead of the key Fed Interest Rate Decision.

Traders’ expectations imply that the target rate would be raised from 75-100 bps to 150-175 bps. Markets expect that the Fed will be forced to raise rates aggressively in order to fight inflation.

Bond markets have seen strong moves in recent trading sessions. The yield of 2-year Treasuries increased from the 2.80% level to the 3.45% level in a matter of days. Similar moves were seen in 10-year and 30-year yields. Currently, the yield of 2-year Treasuries has pulled back below the 3.35% level, which is not surprising after a strong rally.

Higher yields have provided strong support to the U.S. dollar, and the U.S. Dollar Index touched highs that were last seen back in 2002. At such levels, the American currency will be extremely sensitive to the Fed Interest Rate Decision and the subsequent commentary. In case Fed Chair Jerome Powell is not hawkish enough, traders may rush out of their long positions in the U.S. dollar.

ECB Emergency Meeting Puts Additional Pressure On The Euro

Euro bulls will need strong catalysts to push EUR/USD higher as the economic situation in the Eurozone is challenging. The 10-year bond yields of weaker EU members like Greece or Italy have recently moved above the 4.00% level while ECB has not even started to raise the rate or cut its balance sheet.

The ECB had an emergency meeting today and stated that “the pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions”.

The ECB also said that it will “accelerate the completion of the design of a new anti-fragmentation instrument”, which means that policymakers are seriously worried about the huge spread between “good” Germany’s bonds and “bad” bonds from Italy or Greece. Theoretically, the current situation may develop into a debt crisis for weaker EU members, and such worries would continue to put pressure on the euro.

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