- EUR/USD inched up in cautious trade, as yields on German bunds sunk to an all-time record low while foreign exchange traders continued to react to nebulous comments from Janet Yellen on the possibility of a summer rate hike from the Federal Reserve.
The currency pair traded between 1.1339 and 1.1380, before settling at 1.1357, up 0.02% on the session. EUR/USD has traded in a tight range in each of the last three sessions since surging nearly 2% last Friday after disappointing U.S. employment data increased the possibility that the Fed could take a June interest rate hike off the table. With the recent rally, the euro has nearly erased all of its losses from May's swoon when it fell from 9-month highs versus its American counterpart.
EUR/USD likely gained support at 1.1055, the low from March 15 and was met with resistance at 1.1616, the high from May 3.
Volume on foreign exchange markets on Tuesday was light in response to Yellen's final public comments before next week's critical Fed meeting. Addressing a luncheon audience at a World Affairs Council event in Philadelphia on Monday, Yellen omitted any reference to the timing of the Fed's next interest rate hike. Yellen's stance represented a shift from her position less than two weeks ago when she sent strong indications that the Fed appeared ready to resume tightening of its monetary policy cycle.
Following last December's historic interest rate hike by the Federal Open Market Committee (FOMC), the Fed has left its benchmark Federal Funds Rate at a targeted range between 0.25 and 0.50% at each of its three meetings this year. Yellen's comments in late-May appeared to suggest that the FOMC could be ready to raise short-term interest rates on multiple occasions before the end of the year, as the labor market and inflation showed signs of firming. At its FOMC meeting in March, the committee's median projections forecasted the potential for two rate increases of 25 basis points each in 2016.
But last week the domestic labor market suffered an unforeseen shock when the U.S. Department of Labor reported that the economy added 38,000 in May, the fewest number of monthly jobs in nearly six years. While maintaining her signature calm disposition, Yellen downplayed the unsettling developments arguing that it is not constructive to attach too much significance to one report. Yellen also emphasized that a potential "leave" vote by U.K. voters in a controversial June 23 referendum could pose serious repercussions to the world economy.
Yellen's comments have done little to sway market sentiments. The CME Group's (NASDAQ:CME) FedWatch tool lowered the probability of a July rate hike to 24.8% on Tuesday from 25.8% one session earlier. The market sees virtually no chance of a rate hike next week when the FOMC convenes for the two-day meeting on June 14-15. The current probability of a June rate hike fell to 1.9% on Tuesday from 3.8% during the previous day.
Market players continued to pile into safe-haven assets, ahead of the launch of the European Central Bank's corporate bond-buying program on Wednesday. In Tuesday's session, yields on theGermany 10-Year fell more than four basis points to an all-time record low of 0.04% before settling at 0.05%. Yields on the U.S. 10-Year, meanwhile, fell two basis points to 1.72%, remaining near 1-month lows. Over the last year, government bond yields on U.S. 10-year Treasuries and German bunds have each plummeted by more than 65 basis points.