Daily Market Recap – EURUSD The dollar regains strength after the Fed's minutes

The EUR/USD climbed to a nearly three-month high this morning at 1.2240 following disappointing US housing starts figures. The dollar then regained some strength against the euro after minutes from the Fed's latest meeting showed that the debate is opening up about the U.S. central bank moderating its asset purchases.

Housing starts were down 9.5% in April, while the consensus was for a more measured decline of 1.6%. In addition, the February and March figures were revised slightly downward. This decline is likely to be credited to the dramatic rise in some inputs, such as lumber, which was up 300% year-over-year until a few days ago.

Since the beginning of the month, the disappointing U.S. statistics have been repeating themselves and have brought analysts to downplay the probability of a normalization of the Fed's monetary policy. The market's probability of a rate hike by the end of the year has dropped from 15% at the beginning of the month to 8% on Tuesday.

However, according to the April 28 FOMC minutes, Fed officials are beginning to wonder if it will soon be time to consider a plan to reduce the central bank's purchases of Treasuries and other assets if the U.S. economy continues to improve at this pace.

That possibility has captured the attention of the markets and helped support the greenback. “Since the Fed met, the market is indeed focused on the progress of the economy and is discussing whether the Fed will reduce its asset purchases by the end of the year,” explained Joe Manimbo of Western Union.

Later in the week, the May flash PMI reports for Japan, Europe, and the US will be the most likely to influence the markets. Weaker than expected data from the U.S. would continue to support the Euro and vice versa.

From a technical perspective, the EUR/USD formed a major bullish reversal pattern yesterday by breaking above its resistance at around 1.22. Breaching this resistance allows for the formation of an “inverted head and shoulders” bullish reversal pattern theoretically paving the way for a rise to $1.27.

However, we can see the exchange rate testing double resistance at around $1.2240, corresponding not only to the February high but also to the upper bound of its bullish channel in which it has been moving since the beginning of the month.

(Chart Source: Tradingview 19.05.2021)

Below these two resistances, the risk/reward ratio favors short-term selling. It will probably be preferable to wait for a return of the EUR/USD to the bottom of its channel, or to the neckline at $1.22, to reposition itself in the direction of the underlying trend.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.