Three Factors Driving Euro Moves

The US dollar roared back on Tuesday, aided by a hawkish comment from a core Fed member. The Aussie joined USD as the top performer while the euro lagged. The BOJ meeting minutes and Japanese PPI are up next.  The Premium AUDNZD has depeened into its gains, whole both EURAUD and EURCAD are in the red. A new Premium update is due tomorrow.

EUR/USD hasn't been straightforward for the past month and that continued Tuesday. We look at why this pair has been so volatile and where Greece fits into the picture. The pair tumbled to 1.1150 from 1.1340 in European and US trading.

The final flush lower came after the Fed's Powell said there was a 50/50 chance of a Fed hike in Sept. That's higher than markets are pricing.

Other factors including a surge in new home sales, a beat in the Richmond Fed and slightly soft durable goods orders added to USD volatility.

In the bigger picture, the three key factors for EUR/USD are: 1) Fed expectations 2) The carry trade 3) Greece. In general, that's also the order of importance. Greece grabs the headlines but the correlation with Fed expectations (based on Fed funds futures) is convincingly high.

Greece and the carry trade also interact. Some fresh snags appeared in closing a deal. The IMF is reluctant to allow SMP profits to go to Greece and debts to be restructured. Fresh meetings are scheduled Wednesday but a deal still looks 90% likely, even if it's only a six-month extension.

What's important to keep in mind is that the euro is now a funding currency. It's not a coincidence that the Swiss franc (also a funding currency now) mirrored the euro's fall on Tuesday. The increased stability in Greece will renew demand for carry trades and may put the euro under pressure so long as Bund yields remain below 1%.

Asia-Pacific traders will continue to focus on China after the Shanghai Composite rebounded 2.2% yesterday. The calendar features the May 22 BOJ minutes and PPI at 2350 GMT. Talk in the minutes about hitting the 2% inflation target could cause some JPY moves but it's unlikely.