- EUR/USD has been falling throughout the day on the back of an uber-hawkish Fed.
- Fed’s Powell testified to Congress and the US Dollar took-off.
EUR/USD keeps falling as we move into late US trade in what has been a maximum drop in the single currency following uber-hawkish rhetoric from the Federal Reserve’s chairman on Tuesday who testified to Congress.
The main words that got the US Dollar going coming from the Fed’s chair Powell were, “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
As a consequence, the yield on the US 10-year Treasury note rose to 4% before easing back to 3.96%, remaining marginally below the three-month high of 4.07% touched on March 2nd as investors assessed the pace of future rate hikes by the Federal Reserve. This gave the greenback a boost. The DXY index, a measure of the US Dollar vs. a basket of currencies, vaulted 105 the figure in a move that started out from 104.43 and kept going until 105.435.
Meanwhile, the Euro is likely to be hamstrung as Germany may still suffer a technical recession in Q4 2022/Q1 2023. However, analysts at Rabobank argued that ”at least more recent data are indicating resilience in the economy.” On the other hand, the analysts also said, ‘resilient’ is not ‘strong’ and ”the market is facing these data releases with longer EUR positions than at the end of last year. This suggests that the hawkish rhetoric of the ECB may struggle to coax the EUR significantly higher particularly given the recent buoyancy of the greenback.”
Of note, inflation remains stubbornly high in the Euro Area which was evident from the February inflation numbers. Officials, such as ECB’s Pierre Wunsch indicated that it was not unreasonable to expect ECB to hike to 4%. ECB policymaker Klaas Knot said on Tuesday that the ECB can be expected to keep raising interest rates for “quite some time” after March. Knot said that the current pace of hikes could continue into May if underlying inflation does not materially abate. “Once we see a clear, decisive turn in underlying inflation dynamics, I expect the ECB to move to smaller steps.”
Knot also argued that inflation appears to have peaked. The sharp decrease in energy prices seen over the last months could bring down headline inflation even faster than what the ECB is projecting, the policymaker added. He does not see a recession in the winter and pointed out that the slowdown in economic growth seems “even more shallow, short-lived than expected”.