FXE: EUR/USD Drops Sharply on Talk of Higher U.S. Interest Rates
The divergence between the European Central Bank and the U.S. Federal Reserve took its toll on the EUR/USD on Tuesday with the Forex pair dropping sharply lower. The move was triggered by comments from Federal Reserve member Jerome Powell who suggested the Fed rate hike could come as early as September. He also added that a December rate hike is a possibility. Powell also said that the central bank could add as much as a percentage point this year if the economy grows as anticipated.
The Euro fell despite growing hopes Greece could reach a deal with its creditors later today. Greece leaders presented a new set of proposals to the Eurogroup on Monday that should help it avoid a default on its loan from the International Monetary Fund and a possible exit from the Euro Zone.
In other news, French Manufacturing PMI came out slightly better than expected at 50.5. French Flash Services PMI also beat the estimate. German Flash Manufacturing PMI and German Flash Services PMI were also better than expected. Overall Euro Zone Flash Manufacturing PMI was 52.5 versus the 52.0 estimate. Euro Zone Flash Services PMI also beat the estimate 54.4 to 53.7.
There was no economic news out of the U.K, but the GBP/USD fell in sympathy with the Euro.
Powell’s comments helped drive up U.S. interest rates which made the U.S. Dollar a more attractive investment. This led to more long liquidation by August Comex Gold traders.
Technically, August crude oil futures continued to straddle a key retracement zone at $60.50 to $61.35 as investors worked out the fundamentals news. Earlier in the session, prices were capped by the strength in the U.S. Dollar and weak manufacturing data from China. Buyers, however, came in to support the market and drive it higher in anticipation of another drawdown in U.S. oil supplies. Later today, the American Petroleum Institute is expected to release its weekly report which is expected to show U.S. inventories decreased by 2.3 million barrels the week ended June 19.
The U.S. Dollar surged after Powell’s comments drove interest rates higher, but backed off its high following the release of the U.S. Durable Goods report for May which showed a greater-than-expected decline of 1.8 percent.
U.S. New Home Sales helped underpin the dollar after the report showed an increase of 2.2 percent in May to more than a seven-year high. The FHFA Housing Price Index showed an increase of 0.3 percent in April.
On tap for tomorrow are more Eurogroup meetings, U.S. Final GDP and weekly crude oil inventories.
