EUR: Further declines in EUR/USD are predicted as US Bond Yields Reach New Omni Highs.

Oct 20, 2022
VOT Research Desk

Market Insights, Considerations & Analytics

The yields on US Treasury bonds are still at multi-year peaks.

The ECB anticipates raising rates by 75 basis points the following week.

The story of fighting inflation is once again being told as US Treasury yields rise. The yields on the carefully watched 2- and 10-year USTs are at 4.59% and 4.165%, respectively, the upper echelons in around 15 years. Recent remarks from Fed officials confirm that, in the ongoing battle against intense price pressures in the US, the central bank will increase rates further and for a longer period of time if necessary. Later in the session, four Fed officials—Harker, Jefferson, Cook, and Bowman—speak and are likely to reiterate recent Fed language.

The most recent version of the CME Fedwatch tool predicts a 92.3% chance of a 75 basis point rate increase at the FOMC meeting on November 2 and an 80% chance of another 75bp rise at the meeting on December 14. By the end of the year, the Fed inflation target would be between 4.50% and 4.75%.

The European Central Bank (ECB), which will announce its most recent policy decision the following week, is expected to raise rates by 75 basis points. The ECB is scheduled to raise rates further over the upcoming months, providing the single currency with some support as Europe continues to struggle with headline inflation that is close to double digits.

An unbroken string of lower highs and lower lows, created by the pair’s steady downward movement, is seen as a bearish technical setup. Around 0.9537, the last lower level is located and is likely to see resistance, particularly if US bond yields rise further. The October 13 low print at 0.9632 will serve as a temporary level of support prior to this level. Parity is the next level of resistance, and it appears that it will be the most challenging to breach.

According to data from retail traders, 59.27% of traders are net-long, with the long-to-short ratio standing at 1.46 to 1. Traders who are net-long are up 13.92% from yesterday and down 2.06% from the previous week, while those who are net-short are down 13.58% from yesterday and up 9.01% from the previous week.

The fact that traders are net-long signals that the price of the EUR/USD may continue to slide. We normally take a contrarian stance against the attitude of the crowd. While posture is less net-long than last week, it is less net-long than yesterday. We have a further mixed EUR/USD trading inclination based on the current mood and previous moves.

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