- EUR/USD is subdued just under its 50DMA as traders await Fed speak from two hawks and Chairman Jerome Powell.
- Hawkish Fed speak could support the US dollar, says ING.
EUR/USD has continued its recent pattern of ranging within well-estabilished parameters so far this week. After rebounding on Monday from sub-1.1300 lows as the pair found support ahead of a test of recent lows in the 1.1280 area, EUR/USD rallied all the way back to test its 50-day moving average in earlier Tuesday trade in the 1.1340s. However, for the third time in as many weeks, EUR/USD has been unable to stage a meaningful rebound to the north of this level and is now back to trading in the 1.1330s, broadly flat on the session.
Commentary from senior ECB policymakers on Tuesday has for the most part gone under the radar. President Christine Lagarde emphasised the bank's “unwavering” commitment to its price stability mandate whilst also acknowledging the concern about inflation expressed by many citizens. ECB Chief Economist Philip Lane reiterated the banks current stance that Eurozone inflation is not seen remaining about 2.0% in the medium-term (recall the bank’s forecast for 2023 is for HICP inflation to fall back to 1.8% from an average of 3.2% in 2022). New Bundesbank President and ECB governing council member Joachim Nagel picked up where his predecessor Jens Weidemann left off with a warning in his first speech inflation may remain elevated for longer than currently expected, whilst also urging that the ECB must remain vigilant.
Fed speak incoming
A much more important driver of FX and indeed broader market sentiment in 2022 has been expectations for Fed tightening, which have grown increasingly hawkish after last week’s hawkish Fed minutes and strong labour market report. FX strategists have been surprised by the buck’s inability to muster a sustained rally despite numerous banks and analysts now calling for as many as four rate hikes in 2022 starting in March, as well as for balance sheet runoff to begin as soon as H2. But with Fed hawks Ester George and Loretta Mester speaking at 1400GMT and 1430GMT, followed shortly thereafter by Fed Chair Jerome Powell at 1500GMT ahead of Wednesday’s December Consumer Price Inflation report, there are plenty of potential USD bullish catalysts this week.
Powell is speaking at his Fed Chair renomination hearing before the Senate Banking Committee, with investors hoping for clues as to the timing of expected policy tightening. His remarks in a short initial statement have already been published and did not contain any commentary on the outlook for policy. But there will be a Q&A session where Powell may delve into more detail. Today’s appearance marks Powell’s first opportunity to say how the current outbreak of Omicron influences the outlook for policy – market participants will expect Powell to reiterate the stance laid out in December that it does pose a significant near-term risk to the economy and, if anything, may add to inflation risks. “Today also offers the first opportunity for Fed Chair Powell to comment on the tidal shift in market expectations following the revelations in the FOMC minutes last week” SocGen points out.
Meanwhile, ING warns traders to “expect markets to be particularly sensitive to any discussion on the reduction of the Fed's balance sheet, a topic that became particularly hot after the December FOMC minutes and may cause further fragility in the bond market (and offer more support to the dollar) down the road”. The bank adds that “any Powell-induced dollar strength would normally be channeled through weaker low-yielding FX, although the current soft environment for equities may also continue to weigh on the pro-cyclical sector – leaving the dollar itself as the only potential winner from the Fed’s hawkish message.”