Fed Near Neutral Signals Caution Ahead, Shifting Focus to Fixed Income in 2026 
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EURUSD trending lower early last week, seeing a large dip on Friday. Starting last week close to 1.13. EURUSD now trades just short of 1.12.
Fed chairperson Yellen foresees the case for a hike as strengthening in recent months. Vice Fisher sees these implying two hikes this year. Still, data-dependant obviously, and non-farm this week will be key.
The 3M interest difference (EURUSD) has been stable over the last week. USD 2017 FRAs rose 8-9bps last week, while EUR FRAs were up by 1-bps.
The new forecast for 1, 3 and 12 months are 1.11, 1.10 and 1.15, respectively.
The Fed hiking cycle will be very gradual. While growth will pick up, wage and price growth will remain subdued.
EIA’s crude inventory check is also scheduled to be announced during US sessions, the higher oil prices will be a USD negative.
EZ would continue it’s anemic recovery, with inflation slowly edging higher. The ECB will extend asset purchases and cut deposit rate, but markets will not be impressed. Euro will benefit from
Trade tips:
There is an interesting data publication on the agenda in the shape of the ADP employment poll for July and moreover, various FOMC members will be speaking publically (Rosengren, Evans, Kashkari), but it seems questionable that this will have a decisive effect on the market participants’ rate hike expectations.
Market players are also looking ahead to Friday’s nonfarm payrolls report, which could determine whether the Fed raises rates in September.
On speculative grounds, one can eye on option tunnel spread which is the debit spread of binary version.
In-The-Money tunnel would be formed of shorts of in-the-money binary put with shorter expiries below the current exchange rate less an Out-Of-The-Money longs binary delta put below the exchange rate.
We wouldn't be surprised if the spot FX drifts upto 30-40 pips below current levels of 1.1136 levels in no time.
