EUR/USD consolidates in choppy conditions ahead of the Fed

The EUR/USD pair is regaining some territory into the Wall Street close as the greenback continues to be faded, unable to break higher as traders start to move to the sidelines ahead of the Federal Reserve.

In contrast to the expectations the Fed, however, the European Central Bank’s tightening expectations remain subdued which has given the US dollar a boost over the euro of late.

At the time of writing, at 1.0522, the euro is some 0.18% higher at and has travelled from a low of 1.0492 to a high of 1.0577 so far. The markets are pausing in the trade of between the ECB and Fed. However, the divergence favours the greenback with the ECB WIRP suggesting odds of liftoff June 9 are now around 25% vs. 30% at the start of this week and 40% at the start of last week, while liftoff July 21 remains fully priced in, as analysts at Brown Brothers Harriman noted. By stark contrast, a hawkish outcome is expected for the months ahead.

Meanwhile, data has been released which do not paint the best picture for the eurozone. Eurozone reported March PPI and Unemployment. The PPI climbed 36.8% YoY vs. 36.3% expected and a revised 31.5% (was 31.4%) in February, while the Unemployment Rate arrived in at the expected 6.8% vs. a revised 6.9% (was 6.8%) in February. Germany also reported Unemployment at -13k vs. -15k expected and -18k in February, with the Unemployment Rate firm at 5.0%.

The PPI readings are worrisome as the acceleration implies further upside pressure on CPI in the coming months. As for the Fed, while consecutive rate hikes of at least 50bps are expected, the analysts at BBH also explained that the March minutes also showed that the Committee was well placed to begin the process of reducing the size of the balance sheet as early as after the conclusion of its upcoming meeting in May.

If the Fed stays true to form, then a plan close to the one outlined here will be announced Wednesday and implemented on May 15. Traders will be looking to the comments by Chairman Jerome Powell for further clues on future rate hikes.

Looking to the US dollar, the greenback came under pressure against a basket of currencies on Tuesday, as investors start to move to the sidelines ahead of the Fed. With inflation running at its fastest pace in 40 years, DXY hit a 20-year high at the end of last week’s business on expectations the US central bank will be more aggressive than its peers while expecting a stronger US economy than that of the eurozone.

However, supporting the euro on Tuesday, a gauge of global equity markets rose slightly on Tuesday. MSCI’s gauge of stocks across the globe (IACWI) gained 0.23% and the pan-European STOXX 600 index (.STOXX) rose 0.09% after surviving a flash crash on Monday in Nordic markets caused by a sell order trade by Citigroup.