EUR/USD Heads Toward Support on Rekindled Fed Tightening

The dollar continued to rally on the rekindled Fed tightening narrative, which was sparked by last Friday‘s unexpected rise in U.S. April core CPI, with Fed chair Yellen having subsequently said that a rate hike this year would be appropriate if the economy continues to improve. Yellen also repeated her view that Q1 weakness in the economy was transitory and expects growth to accelerate, which fits both our view and the general view of market economists

The ECB’s Hansson warned low rates won’t last forever. Hansson continued the current ECB efforts to step up pressure on governments to reform and try to ensure that the central bank’s accommodative policy stance doesn’t have unwelcome side effects. Hansson highlighted the possible risks of QE, namely that some government’s will for reforms would decline and stressed that while substantial purchases of government bonds by central banks make it temporarily cheaper for governments to borrow, this shouldn’t be used as an argument to avoid necessary but painful reforms.

He also stated that an agreement on Greece not in sight. The governing council member said there was an agreement already on February 20 that there should be an accelerated push for an agreement and now, three months later, we are in a situation where a solution is not in sight and the clock is ticking.

April durable goods data is out Tuesday and should have orders down -0.5% with shipments growing by 0.5% and inventories growing by 0.2%. There is downside risk to the release from the April industrial production data which declined by 0.3% for the month following another 0.3% decline in March.

The technicals point to a stronger greenback as the EUR/USD continues to move toward trend line support that connects the lows in March and April and comes in near 1.07. Momentum has turned negative as the MACD (moving average convergence divergence) index generated a sell signal, which points to lower future prices.

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