The Euro May Have a Temporary Cap

The Euro May Have a Temporary Cap

EUR/USD may have trouble getting through 1.19000 due to instability in the Eurozone

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This won’t be easy, but let’s avoid all the cross-nation politics for a moment. Considering the Trump/Kim Jong Un summit, the Trump-Kudlow-Navarro beef with Prime Minister Justin Trudeau of Canada, and the U.S. vs. the G6, it’s easy to forget the 2 most important summits this week. The FOMC meeting and the ECB meeting. The markets are expecting the U.S. Fed to raise rates by 25 basis points and the ECB to address ending their quantitative easing (QE) program. The Euro will move this week, but it may not continue its current rally depending on how right the markets are about these expectations.

What to look for

The Fed is expected not only to raise rates but to keep September in play for rate hike number 3 in 2018, address the “balance of risks which they do in almost all FOMC post-meeting statements and leave the dot plots unchanged. Anything more passive or aggressive than this will move the dollar index quite a bit especially given we will have already seen the May CPI figure for the U.S. due out on Tuesday morning. The ECB, on the other hand, is not expected to touch rates of QE. The market is only expecting them to be specific on when and how they will end the program. This expectation is based off multiple comments this past 10 days referencing the end of QE, by influential voices in the Eurozone including Peter Praet, Yens Weidmann, and Klaas Knot. The Euro rallied 2.8% against the dollar during this period on the backs of all these comments getting up to a short-term high of 1.18394 before stabilizing between 1.17200 and 1.18200. However, the political issues mentioned above, recent lukewarm economic data and the political turmoil in Italy and Spain could keep Mario Draghi’s foot off the brake when it comes to policy accommodation. If Draghi is more dovish than the market expects in his post-meeting press conference on Thursday morning, the Euro will get hit and hit hard. 

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