EUR/USD Soft After Powell’s Readiness for Bigger Rates Hikes if Needed

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Chair Powell on Inflation & Rates

The head of the US Federal Reserve, delivered his first remarks after last week's rates lift-off, speaking at the National Association for Business Economics (NABE) annual conference. [1]

Mr Powell touted the bank's commitment to "restoring price stability while preserving a strong labor market" and warned that inflation is "much too high".

The latest data released earlier this month, had shown that Headline Consumer Price Index (CPI) had climbed 7.9% year-over-year in February – the highest level since 1982.

In this backdrop, the central bank had raised rates last week by 25 basis points, refraining from a more aggressive adjustment, as Mr Bullard wanted. Mr Powell showed readiness for a more hawkish move in upcoming meetings if needed, with yesterday's remarks, noting that "If we think it's appropriate to rise 50 basis points, we will do so".

Market Interest Rate Pricing

During last week's monetary policy decision, the bank also released the updated staff projections, including the closely watched dot-plot, that reveals their views for the appropriate rate path. [2]

The new median projection shows rates at 1.9% in 2022, meaning roughly six more quarter-point increases, as many as the bank's remaining policy meetings.

Markets seem to be more aggressive, with the CME's FedWatch Tool projecting interest rates at 2.25%-2.5% by year end with 44% probability at the time of writing, implying up to seven more hikes. [3]

For the upcoming Fed meeting in May, a 50 basis points adjustment is the outcome with the highest probability (63.9%).

EUR/USD Soft After Last Week's Rebound

The pair comes from its first profitable week since late January, as the Fed's rate hike was well telegraphed, but during the current one, it returns to negative territory - affirming our caution around its upward aspirations.

Chair Powell's hawkish remarks weighed on EUR/USD, which started the day with further losses. This keeps the risk of a decline towards 1.0900 alive, but fresh catalyst will be needed for such a move that could bring 1.0805 back into the spotlight.

Despite its poor start to the week, the common currency finds support during the European session and reclaims 1.1000. This gives it the right to push for a return above 1.1068-71, but it still does not inspire confidence for a recovery above 1.1150.

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 22 Mar 2022 https://www.c-span.org/video/

2

Retrieved 22 Mar 2022 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf

3

Retrieved 25 Jun 2022 https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html#

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