The USD rally gained further tailwind yesterday and EUR/USD dropped below 1.08 overnight supported by some hawkish comments from Dallas Fed president Richard Fischer (non-voter, Hawk) saying that the Fed should increase interest rates this month.
EUR/USD is now significantly oversold both according to most technically measures, such as the relative strength index (RSI), and according to our short-term financial model, which indicates that EUR/USD currently trades 2.9 standard deviation below its fair value estimate of 1.1295 (spot ref.: 1.08).
While the increasingly stretched spot signals are no barrier for further USD strength, it suggests that momentum is likely to ease in the near term leading to a period of consolidation.
On the other hand, last week's strong labour market report has increased expectations that the Fed will remove 'patience' from its statement in connection with the FOCM meeting next week on 18 March.
Hence, we could still see some USD buying as the market positions for a more hawkish FOMC.
Danske Bank notes as follows on Tuesday:
- We expect the Fed to increase interest rates in June and look for further USD strength in the coming months.
- We target EUR/USD at 1.05 in 6M but we stress that risk are tilted to the downside relative to our forecast, meaning that EUR/USD temporarily could undershoot our 6M target.
