EUR/USD floats above 1.0400 as DXY tracks softer yields ahead of Fed, ECB’s Lagarde

• EUR/USD extends recovery from monthly low, grinds higher of late.
• Pullback in Treasury yields from 11-year high allows bears to position for the Fed.
• Hawkish ECBSpeak, mixed US data also underpin corrective pullback.
• High expectations from FOMC highlight fears of disappointment, ECB’s Lagarde will be eyed too.

EUR/USD holds onto the previous day’s corrective pullback around 1.0400 amid a sluggish Asian session on Wednesday. The major currency pair cheers recently hawkish comments from the ECB policymakers and a retreat by the US Treasury bond yields to portray short-covering moves ahead of the key Federal Open Market Committee (FOMC).

European Central Bank (ECB) Governing Council member Isabel Schnabel said on Tuesday that the monetary policy can and should respond to a disorderly repricing of risk premia, per Reuters. On the same line was ECB policymaker Klaas Knot, during an interview with Le Monde, who said that there is a real probability that rates will continue to rise in October and December.

On the other hand, US 10-year Treasury bond yields drop 3.9 basis points (bps) to 3.45% as the bond coupons ease from the fresh high since 2011. The same underpins the mildly bid S&P 500 Futures around 3,750 to favor the EUR/USD buyers.

Also likely to have favored the EUR/USD rebound could be the easy US data. That said, the US Producer Price Index (PPI) matched 0.8% MoM forecasts for May, also easing to 10.8% YoY figures versus 10.9% expected and prior readouts. The PPI ex Food & Energy, known as Core PPI, dropped below 8.6% YoY forecasts to 8.3%.

However, rising expectations of a 75 bps rate hike from the Fed join the diplomatic push from the White House officials to hint at the US dollar’s rebound, which challenges the EUR/USD pair. White House (WH) Economic Adviser Brian Deese and National Economic Council Deputy Director Bharat Ramamurti were among the US diplomats who highlighted the inflation woes and showed readiness to battle the same during their interviews with CNN and Bloomberg respectively.

Elsewhere, covid woes in China, one of the world’s biggest gold consumers, also weigh on the metal prices. Beijing reported the highest coronavirus cases in three weeks the previous day and called for more activity restrictions. Shanghai, on the other hand, marked ease into the COVID-19 cases but keeps the recently announced limits to curb the virus from spreading too fast.

Moving on, Eurozone Industrial Production for April and the US Retail Sales for May could entertain EUR/USD traders, along with the risk catalysts. Additionally, ECB President Christine Lagarde is also up for a speech and may help the EUR/USD prices gain upside traction.

However, major attention will be given to the Fed’s interest rate decision and the economic forecasts as Chairman Jerome Powell has a tough task of pleasing markets and taming inflation at the same time.

Read: Federal Reserve Interest Rate Decision Preview: Damn the inflation, full speed ahead

Technical analysis

EUR/USD rebound remains elusive until crossing multiple hurdles surrounding 1.0500, marked during early May. That said, bears need a clear break of 1.0400 to refresh the yearly low, currently around 1.0350.