Key Points on Euro, US Dollar, Fed, Treasury Yields, China, and Debt Default:
- The Euro is currently facing downward pressure as the US Dollar gains strength in the market.
- The ongoing trend in the EUR/USD pairing remains consistent, although a breach above the 1.1000 level has the potential to alter this trajectory.
- A significant question arises: if Treasury yields continue to rise due to official selling, could this impact the EUR/USD pairing?
EURO- US dollar Macro Perspective
The decline of the Euro can largely be attributed to the notable strengthening of the US Dollar across various fronts.
Recent minutes from the Federal Open Market Committee (FOMC) meeting revealed a more hawkish stance than initially anticipated by the market.
Consistent messaging from multiple Federal Reserve speakers in the past week has emphasized a commitment to maintaining tight monetary policies for an extended period. The minutes indicated that the possibility of another interest rate hike is being considered should conditions warrant such action.
In the short-term interest rate market, the prospects of rate cuts for the 1- and 2-year periods have receded by approximately 10 to 15 basis points this week.
Treasury Yield Curve
Crucially, further along, the Treasury yield curve, there has been a parallel upward shift, reinforcing the strength of the US Dollar.
The benchmark 10-year bond yield is currently hovering around 4.29%, a mere step away from the 4.33% level recorded in October of the previous year – the highest return since 2007.
Recent data on Treasury holdings for June indicated that China has consistently reduced its holdings this year. The only exception was March, a month in which the Yuan experienced a significant rally, leading China to become a net buyer of US Government bonds.
As the Yuan weakens this week, it’s possible that China has resumed selling US debt in favor of selling USD to acquire the Yuan.
Market sentiment toward China, the world’s second-largest economy, has deteriorated in recent days. This is despite the People’s Bank of China (PBOC) reducing its 1-year medium-term lending facility rate from 2.65% to 2.50%.
This week witnessed notable defaults by two major property developers – Country Garden and Sino Ocean – on both offshore and onshore bonds. Contagion concerns came to the forefront following Zhongrong International Trust Co.’s failure to meet obligations to clients over the past week.
Should this trend continue, there is potential for further downside for the EUR/USD pairing.
EUR0 -US dollar Daily Technical Analysis Overview
The EUR/USD pair remains below a descending trend line and is on track for its fifth consecutive day of declines.
In the event of a rally and approach toward the aforementioned trend line, resistance could be encountered at the 21- and 34-day simple moving averages (SMA).
Additional resistance might manifest in the range of 1.1065 – 1.1095, which includes historical breakpoints as well as a recent high, just preceding the psychological level at 1.1100.
Higher up, resistance levels could emerge at the breakpoint stemming from the March 2022 high at 1.1185, or the recent peak at 1.1275, both coinciding with historical breakpoints.
Beyond these levels, resistance might materialize at the Fibonacci Extension of the movement from 1.1095 to 1.0635, specifically at 1.1380. Slightly above, further breakpoints lie in the 1.1385 – 1.1395 range.
For support, attention may turn to the 78.6% Fibonacci Retracement levels at 1.0770, positioned just below the 200-day SMA.
Preceding this level, previous lows and the breakpoint within the 1.0830 – 1.0835 region could offer a supportive foundation.
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