In the European session, the EUR/USD currency pair fell below 1.0700, extending its daily decline. In its Financial Stability Review, the ECB cautioned that sudden rate rises could cause financial market corrections. The FOMC’s May meeting minutes could be the next major catalyst.

EUR/USD pair may continue to fall until 1.0600 when the rising trend line crosses the Fibonacci 38.2% retracement level.

On the upside, 1.0700 (psychological level, static level) serves as the first line of defence before 1.0750. (monthly high). For bulls to maintain control of the pricing action, the pair must retake 1.0700 and stabilize above it.
After reaching its highest level in a month on Tuesday at 1.0750, the EUR/USD has lost traction.

Meanwhile, rates on both sides of the Atlantic remain consolidative, with the recent uptick in desire for riskier assets appearing to be cooling off on Wednesday.

Earlier in the day, the German GDP Growth Rate increased by 3.8 per cent YoY in Q1, while GfK’s Consumer Confidence Index improved slightly to -26 in June. Consumer confidence in France fell short of forecasts in May, falling to 86 (down from 87 in April).

The FOMC will release the minutes of its May policy meeting in the second half of the day. Markets have already factored in two more 50-bps Fed rate hikes, and participants will be looking for more information on the Fed’s balance sheet reduction strategy. Suppose the minutes reveal that policymakers are willing to sell mortgage-backed securities to reduce the balance sheet by $95 billion per month starting in September. In that case, this may be hawkish.

Conclusion

The EUR/USD pair finished the week with solid advances slightly below 1.0600. Despite ongoing risk aversion, the fundamental driver of the passage was the dollar’s broad decline.