In what promises to be an extremely busy and volatile week for EUR/USD, the pair has started out on a strong note, climbing 21 pips to close at $1.3365. Analysts are already looking towards the upcoming FOMC meeting that concludes on June 19th as a major catalyst, which may very well play an important factor in dictating price action as we approach the release.
Analysts at Rabobank went on to discuss a few reasons why they believe the market is so on edge about what the Fed will have to say regarding tapering asset purchases.
The market uncertainty about the pace of QE3 is caused not only by the wide divergence of views within the FOMC, but also by the mixed signals that the economic data are giving. In fact, several FOMC members have admitted that they will need to see more data to get a clear picture where the U.S. economy is heading.
In going on to further elaborate about this topic, Rabobank mentioned,
The words of Bernanke and other Fed speakers are only indicative of FOMC participants' reaction functions to economic data. They do not tell us anything about the economic data that they will be reacting to. The Fed is not better at forecasting the economy than others.
In conclusion, Rabobank analysts added they do not believe current economic data is strong enough to warrant any QE3 tapering in the near term. Furthermore, they cited weak inflation data, as well as non-farm payroll releases which continue to come in below 200k as two of the primary reasons the Fed will hesitate in stopping asset purchases.
Derek Halpenny, European Head of Global Markets Research at Bank of Tokyo Mitsubishi-UFJ went on to point out some important developments in the most recent weekly IMM position report which may also have influence on the pair as we progress throughout the week.
Our sense that EUR/USD is a lot more about positioning than anything positive about the eurozone is certainly consistent with the weekly IMM data, which revealed a sharp reduction in euro short positions. In the past two weeks, euro short positions have dropped by 80% to the smallest total since February.
To conclude his view, Halpenny went on to comment given the massive unwind the pair has seen over the past few weeks, EUR/USD will most likely have trouble advancing higher from current levels.
Thomas Anthonj, FX Strategist at JPMorgan is still of the opinion the most recent move higher up towards the $1.3400 level is nothing more than a counter-trend rally. "The big picture in EUR/USD remains negative as long as $1.3480/$1.3520 is not broken decisively," Anthonj added. In further discussing the bearish outlook, Anthonj went on to comment a minimum decline toward $1.2436 is expected. In conclusion Athonj commented, "A clear break above $1.3521 would negate the bearish view, and may set the stage a much broader recovery in EUR/USD."