EUR/USD Cautious after Hawkish Fed Remarks & Ahead of US Inflation Update

  • EURUSD
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EUR/USD Analysis

The US Fed has adopted a conservative approach towards removing monetary restraint, due to strong economy, relatively tight labor market and inflation persistence. Markets now expect today's Q4 GDP and Friday's PCE figures for an update on US conditions, which will be taken into account by the central bank.

Governor Waller warned on Wednesday that progress on reducing price pressures "has slowed", while economic output and the labor market are showing "continued strength". Given these conditions, he sees "no rush" to begin monetary easing and argued in favor of holding rates at current restrictive levels "perhaps for longer than previously thought" [1]. Just a couple of days earlier, Ms Cook spoke of a "bumpy and uneven" path of disinflation that warranted a "careful approach" towards policy changes. [2]

The hawkish remarks from these Fed voters, along with rising expectations that the ECB will pivot in June (and possibly beat its US peer to it), given cooling inflation and weak economy, put pressure on EUR/USD. It has moved below the EMA200, which creates risk of new 2024 lows (1.0694), although sustained weakness past it does not look easy at this stage.

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The European Central Bank may be a better candidate to cut rates from many aspects, but has generally adopted a more timid rhetoric around such prospects, with President Lagarde stressing that officials "not there yet" after the last policy decision [3]. Even though the Fed has also been cautious - as highlighted by the latest commentary - it has clearly signaled lower rates this year and the latest projections reaffirmed the view for three cuts. [4]

These factors can limit the EUR/USD decline along with the RSI moving towards oversold condition and give it the opportunity to return above the EMA200. This would bring 1.1017 back in the spotlight, but we are cautious around significant gains. In any case, the monetary policy differential is murky at this point, which may prevent clear moves in either direction.

Nikos Tzabouras

Senior Financial Editorial Writer

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 28 Mar 2024 https://www.federalreserve.gov/newsevents/speech/waller20240327a.htm

2

Retrieved 28 Mar 2024 https://www.federalreserve.gov/newsevents/speech/cook20240325a.htm

3

Retrieved 28 Mar 2024 https://www.ecb.europa.eu/press/pressconf/2024/html/ecb.is240307~314650bd5c.en.html

4

Retrieved 29 May 2024 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20240320.htm

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