USD shorts getting squeezed

Yesterday saw the biggest drop in EUR/USD in 1.5 weeks, following the horrendously weak German ZEW index report and hawkish commentary from the Chicago Fed’s Moskow. Moskow said that the US economy is experiencing some effects from Fed policy, that rates have been a factor in the housing slowdown, and that more rate hikes may still be necessary to battle inflation, noting that risks are tilted towards inflation being too high vs growth being too slow. Very hawkish indeed,

but let’s not forget that Moskow is non-voting member. Atlanta Fed’s Guynn on the other hand was less hawkish, saying that past rate hikes still to impact economy, and it is too soon to think about rate cutting. He will attend Sept 20 FOMC meeting as a voter, and would leave the office on Oct 1.

Inflation figures for the Swiss economy came in at below 2% y/y, and now the market is only pricing in the probability of a 25 bp rate hike by the SNB instead of 50 bp as earlier hoped, and this will further pressure the CHF. USD/CHF however will remain under pressure as long as it stays below 1.2400, a level hampered by the daily down trendline as well as the 50% Fibo at 1.2393.

If it breaks above 1.2400, we may see it running toward 1.2500 again, but if that happens, USD/CHF is very unlikely to hold above that level before Bernanke speech on Friday.

Currently, EUR/USD is resting around the ema support at 1.2783. Downside weakness is favoured, with a break below to target at least 1.2737.

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