EUR/USD Consolidates, Waiting For Central Bank Signals

Frankfurt (July 11)  Overall confidence in the US outlook is firm enough to cap immediate EUR/USD upside with markets waiting for fresh evidence on likely ECB trends and Yellen’s take on US monetary policy.

The US labor-market conditions index rose 1.3 for June after a revised increase of 3.3 for May. This was the 13th successive monthly increase in the index which is likely to maintain strong Federal Reserve confidence in the US labour market with steady gains in employment.

San Francisco Fed President Williams maintained a confident tone surrounding the US outlook with comments that he expected one more rate increase this year while the dip in inflation should be transitory. He also indicated that reducing the balance sheet and raising rates were complementary forms of policy tightening. According to Williams, if inflation did not accelerate, this would argue for a much slower pace of tightening over the medium term, although there were no suggestions of a policy reversal.

There was caution ahead of Fed Chair Yellen’s congressional testimony on Wednesday with expectations overall that she would maintain a confident tone and expect to continue the process of gradual policy normalisation.

German bunds came under renewed selling pressure early in Europe on Tuesday with the increase in yields providing net Euro backing with EUR/USD finding support just above the 1.1380 level.

Consolidation is likely to continue in the short term ahead of Fed Chair Yellen’s testimony on Wednesday with markets also monitoring any remarks from ECB officials.

The speech from Fed Governor Brainard later on Tuesday will also have a potentially important impact on underlying expectations surrounding Fed policies with the dollar under pressure if there is dovish rhetoric.

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