EUR/USD - Will US CPI overshadow Fed decision? Focus on 10-year treasury yield

Despite the bearish RSI divergence and ‘Hanging Man’ reversal on the daily chart last week, the losses in the EUR/USD have been miniscule. The pull back from the high of 1.1285 ran out of steam at 1.1166 on Friday and the spot currently trades around 1.1214.

The US data docket is heavy - May CPI is due at 12:30 GMT, the Fed rate decision will be published at 18:00 GMT and will be followed by Yellen’s press conference at 18:30 GMT.

Dollar to regain bid tone if Fed actions lead to a steeper yield curve

The Fed is widely expected to hike rates by 25 basis points. The move is pretty much priced-in, thus, focus is on whether Yellen still sees a potential for one more rate hike in 2017. Another thing to watch out for is the details of how the Fed plans to unwind its $4.5 trillion balance sheet.

The 2-year yield may spike and the American dollar may strengthen if the ‘Dot Plot’ shows one more rate hike in 2017. However, over the last 6-8 months, the dollar has not really benefited from the resilience in the 2-year yield (flatter yield curve)

What could lift the US dollar is a bigger rally in the long duration treasury yield (steeper yield curve). A big rally in the 10-year yield is likely if the Fed talks about off loading its bond holdings or the US May CPI data, due for release ahead of the Fed decision, beats estimates.

To cut the story short, a weaker CPI release could weigh over the long duration treasury yields and force markets to price-in a flat rate hike path, thus leading to more losses in the US dollar. Fed is anyways likely to take note of the pullback in the long-term inflation expectations. Thus, it appears the CPI release is a big event for the markets than the Fed decision.

The American Dollar may find takers only if the US CPI beats estimates and the Fed talks about balance sheet reduction later this year. The German CPI release and Eurozone industrial production are non events unless the actual number significantly deviates from the market expectations.

EUR/USD Technical Levels

The trend line sloping upwards from April 17 low and May 11 low is intact and is seen offering support around 1.1155 levels. The RSI is holding above 50.00 and the MACD is beginning to show loss of bearish momentum.

A break below 1.1155 (trend line support) would open up downside towards 1.1109 (May 30 low). A daily close below the same would signal a deeper pullback to 1.10 levels. On the higher side, only a daily close above 1.1285 (June 2 high) would expose 1.1366 (Aug 2016 high) and 1.1428 (June 2016 high).