Forex Market: EUR/USD surges on emergency ECB meeting, Fed policy decision remains in focus

EUR/USD gained almost 0.7% on Wednesday after the ECB’s governing council announced an emergency meeting today to discuss the recent sell-off in bond markets, after the spread between the bond yields of Germany and some European peripheral nations, Italy in particular, rose to levels unseen in more than 2 years.

“My hunch is that this is to do with the blowout that we’ve seen in European peripheral spreads this week, which the ECB talked about following the council meeting last week without giving any commitment,” Ray Attrill, head of FX strategy at NAB, was quoted as saying by Reuters.

“This has been something of a weight on the euro this week, but I guess the Fed could easily blow away whatever support the euro draws.”

Meanwhile, as US CPI inflation hit its highest level in four decades in the 12 months to May, investor expectations picked up sharply that the Federal Reserve will probably tighten policy more aggressively.

Markets are now pricing a 95% chance of a 75 basis point rate hike at the Federal Reserve’s policy meeting due to be concluded today.

The US Dollar has appreciated against major peers in the past several months, as the Fed has raised interest rates ahead of most other central banks. But since markets are already expecting such a large rate hike, some analysts believe the greenback may not rise much further after the Fed’s policy decision.

“Given current aggressive market pricing, there is a risk the (Federal Open Market Committee) is deemed ‘not hawkish enough’, pulling down U.S. interest rates and the USD modestly after the meeting,” CBA analysts wrote in an investor note.

“In our view, it will take more than a 75bp hike tomorrow, or a nod to a 100bp hike for the FOMC’s July meeting, to push the USD up significantly after the FOMC meeting.”

As of 8:17 GMT on Wednesday EUR/USD was gaining 0.69% to trade at 1.0487. Yesterday the major Forex pair tumbled as low as 1.0397, which has been its weakest level since May 16th (1.0389).

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.0432
R1 – 1.0468
R2 – 1.0520
R3 – 1.0556
R4 – 1.0591

S1 – 1.0380
S2 – 1.0344
S3 – 1.0292
S4 – 1.0239