EUR/USD Cautious after Wednesday’s Fed-Fueled Rise, Ahead of US NFPs

  • EURUSD
    (${instrument.percentChange}%)

Fed Rate Hike

The US Federal Reserve delivered its biggest rate increase in more than twenty years on Wednesday, hiking by 25 basis points, to 0.75%-1.00%. Furthermore, the bank announced a plan to reduce its nearly $9 trillion balance sheet, starting from June. [1]

The bank has embarked on an aggressive monetary tightening path, in order to combat surging inflation, which it characterized as "elevated" yesterday, while Chiar Powell said that "Inflation is much too high" in his opening statement. [2]

Despite the tough talk on inflation, Mr Powell was conservative in regards to future adjustments and essentially ruled out larger 75 basis points increases in the interest rates. He said that such increases are "not something the Committee is actively considering", having earlier mentioned that "there is a broad sense on the Committee that additional 50 basis point increases should be on the table at the next couple of meetings".

ECB Hawkish Shift

The European Central Bank (ECB) is far behind its US counterpart in the monetary policy tightening path, but has been gradually shifting towards a more hawkish stance. It expects to conclude the asset purchase program (APP) in Q3 and increase rates after that, while there has been some commentary that leaves the door open for an interest rate hike as early as July.

Vice-President de Guindos had said that the APP should end in July and had not rule out rate liftoff in the same month, when asked in an interview with Bloomberg a couple of weeks back [3]. However in a more recent interview with El Coreo, he backtracked, saying that "July is possible, but that's not to say it's likely". [4]

Eurozone is also troubled by high prices, but officials have a tougher job, as the European economy is more exposed to the implications of the war in Ukraine and more dependent to Russian energy imports. Yesterday, the European Commission took another step towards fossil fuel independence, proposing a phased ban on Russian oil. [5]

EUR/USD Analysis

The pair reacted higher on the Fed's decision, as Powell's dovish commentary on future rate moves, weighed on the US Dollar. Above the EMA100 (balck line), the common currency has the chance to take another crack at 1.0648 and the 38.2% Fibonacci of the last leg down, but we are cautious about a larger rebound towards and beyond 1.0727.

However, the US central bank reiterated its commitment to bring inflation down with a front-loaded tightening plan and that reality resonates today, as EUR/USD faces difficulties. Having rejected the 38.2% Fibonacci, it is still vulnerable to renewed pressure towards last week's five year lows (1.0470), although 1.0339-3 is distant at this stage.

Caution is needed, since US NFPs are due on Friday, while form today's economic calendar, US Jobless Claims stand out.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 05 May 2022 https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504a.htm

2

Retrieved 05 May 2022 https://www.youtube.com/watch

3

Retrieved 05 May 2022 https://www.ecb.europa.eu/press/inter/date/2022/html/ecb.in220421~8f5354b0fb.en.html

4

Retrieved 05 May 2022 https://www.ecb.europa.eu/press/inter/date/2022/html/ecb.in220501~ab2e82acc8.en.html

5

Retrieved 30 Jun 2022 https://ec.europa.eu/commission/presscorner/detail/en/speech_22_2785

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