EUR/USD erases gains as Wall Street turns negative

• EUR/USD drops back toward 1.0400 after being unable to hold above 1.0450.
• Euro posts strong gains versus the Swiss franc and the pound.
• FOMC meeting: Expectations of a 75 bps hike continue to rise.

The EUR/USD continue to pull back after the beginning of the American session and it is hovering around 1.0410, slight above Monday’s close. Earlier on Tuesday, the pair peaked at 1.0485 but then lost momentum as Wall Street turned to the downside and as US yields printed fresh highs.

After a positive opening, the Dow Jones is falling by 0.42% and the S&P 500 by 0.11%. The US 10-year bond yield stands at 3.45%, the highest since April 2011. The FOMC meets and will announce on Wednesday a rate hike. Speculations of a 75 basis points rate hike rose after CPI inflation data on Friday; the PPI numbers today came below expectation but did not alleviate tightening expectations.

 “After yesterday's market carnage, the curve looks to have largely priced in this expectation. We are wary that the short EURUSD trade is a bit exhausted given the repricing in the FF curve (though this could remain fluid). EUR is also trading a bit better on the crosses ahead of the Fed decision. That suggests to us that we may see a sell the rumor, buy the fact dynamic into and out of the Fed”, explained analysts at TD Securities.

Dead cat bounce?

The EUR/USD is back near the daily low reached at 1.0396 during the Asian session. A break lower should trigger more losses targeting the YTD low at the 1.0350 zone. Below the next support might be located at 1.0300. The negative bias will likely persist until the FOMC statement. A recovery of the euro faces initial resistance at 1.0435 and above below the 1.0500 zone.

Technical levels