EUR/USD Soft After Hawkish Powell

Powell Testimony

In the face of high uncertainty around the new Covid variant, we were inclined to think that the Fed Chair was more likely to have a moderate tone during his Senate testimony on Tuesday. His earlier-released prepared remarks seemed to lay the groundwork for such an approach as he noted that "The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation" ^[1]

However, Mr Powell came out swinging expressing the view that it would be appropriate to consider wrapping up the asset purchases a few months sooner, while expecting the topic to be discussed on the upcoming meeting. ^[2]

The US central bank announced in early November that it would begin reducing the Quantitative Easing program (QE) by $15 billion that month and in December, but had not committed to future pace. Since then, there have been various officials calling for faster tapering of the asset purchases, offering increasingly hawkish commentary.

On the topic of high Inflation, he said that it is probably a good time to "retire" the term "transitory". The Fed has long maintained that high prices were of transitory nature, but we had recently seen a shift away from this view.

Mr Powell testifies again today, this time in front of the House of Representatives, while communication blackout period begins on Saturday, ahead of the December 14-15 monetary policy meeting.

EUR/USD Reaction

Yesterday's comments led to a sharp drop, but the pair managed to claw back most of the losses and closed Tuesday with profits above 1.1300.

As such, the technical outlook has not changed much form yesterday's analysis. The common currency had tested 1.1374-9 as expected and stays above its EMA100. This gives it the right to push for higher highs, but we are still cautius about a greater advance above the descending trend-line form October highs (currently at 1.1430-5).

Despite that, Mr Powell hawkish comments are supportive for the greenback and highlight again the monetary policy divergence between the two central banks, which is unfavorable or the pair.

Today EUR/USD is pressured and the broader downward trend remains in place. This creates increased risk for a return back below mid-1.1200, although fresh 2021 lows (1.1184) may require a new catalyst.

Due to Omicron risk and volatility, caution is needed, while from today's economic calendar we mostly expect Mr Powell's new testimony and a series of PMIs.