- EUR/USD bulls step in as markets think twice about a long dollar.
- An overcrowded trade in the greenback is vulnerable and cracks are forming.
EUR/USD is firm on the day and higher by some 0.35% at the time of writing. The greenback is suffering a phase of disinterest in what might be an overcrowded trade as investors tread cautiously on the Fed's uber hawkish path.
At the time of writing, EUR/USD is trading at 1.1365 and has moved higher within the 1.1312 and 1.1368 range thus far on the day. Attention has been on the pace for which the Fed intends to taper and the timings of the first and subsequent rate hikes.
''Since the start of November, the Fed has not only announced a plan to taper the pace of its QE programme, but it has subsequently upped the pace to allow a potentially earlier start to rate rises. In addition, it has introduced the likelihood of forthcoming balance sheet reduction,'' analysts at Rabobank explained.
We have seen plenty of demand for the greenback because of this and US yields shoot higher. However, despite more of the same from the Fed this year, with very hawkish minutes, the greenback has not been able to capitalise much on it. The greenback is down around 0.9% as per the DXY for 2022 so far. The DXY is an index that measures the US dollar vs a basket of major rival currencies, the largest of which is the euro making up over 57% of the components of the index.
''Insofar as there is already a lot of hawkish news in the price, the USD may need to see some pullback and fresh news on the interest rate front before finding direction, '' the analysts at Rabobank said.
Earlier today, Federal Reserve's chairman, Jerome Powell, had been testifying to The Senate., Powell said the Fed would stop higher inflation from getting entrenched and this has tamed the rates markets, sending the US 10-year yield a touch lower from 1.7830% to 1.7370% on the day so far on the day, further dampening demand for the greenback.
Then, taking into account covid, the greenback was regarded as a safe bet in this regard. However, given that the Omricon variant is not expected to cause as much damage to global growth, the US dollar could also lose out on this front. The US dollar had otherwise been expected to benefit from safe-haven flows away from risk.
The analysts at Rabobank explained that, for G10 markets, ''the prospects of economic recovery and faster economic growth could allow for some currency strength and re-direct some flows away from the greenback during the course of the year.''
''Given that there is currently a lot of good news in the price, we expect that the USD may continue to struggle to find its feet in the near-term.,'' the analysts added.
''During the latter part of this year, expectations regarding rate hikes in other G10 central banks and the possibility that CPI inflation in the US will start moving back towards the Fed’s target could sap the outlook for the USD. We expect EUR/USD to start edging higher in H2 and through 2023.''
