- EUR/USD struggles for clear directions as it seesaws near the lowest levels in seven weeks.
- ECB’s Lagarde suggests more rate hikes; EU sanctions on Russia add to the bearish bias.
- US inflation cues propel hawkish Fed concerns, allowing DXY to post the biggest weekly gains since September 2022.
EUR/USD dribbles around mid-1.0500s as the European Central Bank (ECB) hawks jostle with the hopes of higher Federal Reserve (Fed) rates during early Monday. In doing so, the major currency pair seesaws around the lowest levels in seven weeks after posting the biggest weekly loss since September 2022.
During the weekend, ECB President Christine Lagarde said, “ECB must make sure inflation returns to 2%,” during an interview with Helsingin Sanomat. On the same line, ECB policymaker and Bundesbank Chief Joachim Nagel said on Friday, he “can’t rule significant further rate hikes after March.”
It should be noted that the previous weekly releases of the Eurozone inflation numbers have also tried to recall the EUR/USD buyers. However, the comparatively stronger US data and hawkish Fed comments seemed to have gained more attention and hence drowned the quote. Also adding strength to the downside bias were the geopolitical concerns surrounding Russia and China.
Friday’s US Personal Consumption Expenditures (PCE) gained major attention as the headline PCE Price Index rose to 5.4% YoY versus 5.3% prior and 4.9% market forecasts. Further, the more relevant Core PCE Price Index, known as Fed’s favorite inflation gauge, rose to 4.7% YoY, compared 4.6% prior and analysts’ forecast of 4.3%.
Talking about the Fed commentary, Cleveland Fed President Loretta Mester told CNBC on Friday that his funds’ rate was above the median in December and still thinks they need to be somewhat above 5%. The policymaker also added that inflation risks still tilted to the upside. Following the suit was Federal Reserve Bank of Boston President Susan Collins who said, “More rate hikes needed to deal with ‘too high’ inflation.” Furthermore, Governor Philip Jefferson said, “Wage growth in the US is running too high to be consistent with a timely and sustainable return to the Federal Reserve’s 2% inflation objective.”
With this, the latest read of the FEDWATCH tool, market players price a year-end effective fed funds rate at 5.3%, versus 5.1% signaled by the US central bank in its December meeting.
Elsewhere, Politico reports fresh sanctions on Russia from the US and the UK, as well as the European Union (EU states) after a clash between Poland and Italy held up the process for days.
On the other hand, Reuters came out with the news suggesting Russia’s halting of oil flow to Poland via the Druzhba pipeline.
Amid these plays, S&P 500 Futures remain indecisive even as Wall Street benchmarks posted the biggest weekly fall in 2023. That said, the US two-year Treasury bond yields rose to the highest levels since early November 2022, staying mostly unchanged at the latest.
To sum up, a battle between the hawks of the ECB and the Fed keeps the EUR/USD on the dicey floor. However, geopolitical concerns favor the bears.
Technical analysis
Given the nearly oversold RSI (14), the EUR/USD bears are likely to rest near the 11-week-old ascending support line, close to 1.0545 by the press time. Also adding to the downside filters is the 200-bar Exponential Moving Average (EMA) level surrounding 1.0530. The recovery moves, however, remain elusive below the two-week-old descending resistance line, close to 1.0615 at the latest.
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The EUR/USD currency pair has continued to hover around the 1.0550 level as the European Central Bank (ECB) frets over the possibilty of higher interest rates and the US Federal Reserve (Fed) remains hawkish.
Recent hawkish talks from the ECB regarding the possibility of raising interest rates and the prospect of a strong US economy has increased pressure on the pair. Recent data from the US Department of Labor showed stronger-than-expected job creation and an improving unemployment rate, setting the stage for a Fed rate hike in December.
This has sent the EUR/USD skidding lower as investors grew increasingly wary of a stronger US dollar. The pair has dropped about 2.7 percent since the ECB signaled its potential rate hike. The hawkish tone of the central bank has also put additional pressure on the euro as investors moved away from riskier bets.
Meanwhile, the US Dollar Index, which measures the greenback against a basket of other currencies, has been steadily climbing on the back of strong economic data. The index peaked at a six-month high of 97.11 on October 11th.
Investors are now staring down the possibility of an increase in the US interest rate and a decreasing likelihood of a rate cut by the ECB. This has sent the EUR/USD pair skating on thin ice as investors have not yet decided whether they will opt towards a more hawkish or more dovish strategy.
Overall, the EUR/USD pair remains under pressure. Until either the Fed or the ECB makes a move in their respective interest rates, the pair will likely continue to teeter around the 1.0550 level.
