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EUR/USD hits new low but averts bigger break as risk improves

May 13, 2022By Reuters

The safe-haven dollar and yen backed off this week’s risk-off highs on Friday as beleaguered equity and risk markets recovered from recent losses, while EUR/USD narrowly averted a break of 2017’s 1.0340 low, its weakest since 2003, before bouncing into the black.

The yen, a big favorite earlier in the week as stocks sank along with Treasury yields, fell the most against the dollar and other rebounding currencies on Friday, as Treasury yields and stocks rebounded from key support levels.

Whether EUR/USD’s 2017 lows and the technical rebounds in Treasury yields and stocks will hold is the question. Nasdaq’s low on Thursday came near the 50% Fibo of the entire pandemic range.

There remains no end in sight for the expanding palette of risks emanating from the war in Ukraine, Chinese growth and COVID lockdown risks nL5N2X501I and the impact that Fed tightening to tame inflation may have on domestic and global growth prospects.

In Friday’s absence of fresh global derisking flows, the bounce in Treasury yields failed to help the dollar because the market is having trouble pricing in much more than a 3% fed funds peak and another 2% of hikes before year-end.

The other dollar restraint is the 2018 prior Fed tightening cycle highs in 2-year and 10-year yields at 2.98% and 3.26% that were nearly reached earlier this week.

EUR/USD was up 0.15% after making its 1.0349 trend low on EBS, but couldn’t get above Friday’s 1.04195 high from early in the day, largely because Bund-Treasury yield spreads remained nearer to session lows and the options market continues to favor euro puts versus calls.

USD/JPY rebounded 0.8% amid the rebound in Treasury-JGB yields spreads and the reversal of risk aversion flows that boosted the yen far and wide earlier this week.

The rebound from Thursday’s correction low by the daily kijun has been slowed by the tenkan, just below the 129.455 Friday EBS high at Wednesday’s low.

USD/JPY will need a bigger rebound in Treasury yields and Fed rate hike pricing to clear the 131.35 20-year highs from Monday.

Sterling gained 0.2% after making a fleeting new 2-year low at 1.2156, aided by the recovery in risk acceptance and oversold pressures, with lofty net spec sterling shorts only second to yen shorts among the majors.

Nonetheless, the 1.36% spread between 2-year Treasury and Gilts yields and the UK’s more daunting macroeconomic issues nL2N2X513N suggest sterling rebounds are selling opportunities.

Aussie and other high-beta currencies won back much of Thursday’s losses, but barely dented April-May losses.

USD/CNH fell 0.35%, with some glimmer of hopes that China’s COVID lockdowns might soon be reduced.

Bitcoin and ether were up about 2.5% and 5.5%, trimming huge May losses aggravated by the recent stablecoin collapse.

Tuesday’s US retail sales and impact from rising prices are next week’s focus.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

This article originally appeared on reuters.com

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