- EUR/USD moved sideways above 1.0400 on less trading activity during Thanksgiving Day.
- The Federal Reserve is expected to drop the 75 basis point rate hike measure to shield the economy from financial risks.
- The European Central Bank is required to tighten policy further to slow inflationary pressures.
- EUR/USD should remain bullish as the risk appetite theme has not faded yet.
EUR/USD showed a lackluster performance in the Tokyo session after resurfacing from critical support at 1.0382. The Euro pair is hovering above the round level support of 1.0400. The major is awaiting a potential trigger for further momentum as the market mood is extremely calm amid the holiday in the United States due to Thanksgiving Day.
The USD Index (DXY) signals a range structure after finding a cushion around 105.64. The lack of pure trading activity has moved currencies to the sidelines, however, the risk impulse is still bullish. Futures on the S&P500 posted gains on Thursday despite the shutdown of U.S. markets. The hangover from less hawkish comments from Federal Reserve (Fed) policymakers is likely to linger for some time. While the Federal Reserve is heavily tilted towards the alternative of slowing the pace of interest rate hikes, the US dollar will remain on the hot coals.
Meanwhile, the euro is set to enjoy further gains as European Central Bank (ECB) policymakers see further policy restrictions due to the lack of a spike in eurozone inflation.
The Federal Reserve should abandon the culture of raising rates by 75 basis points
The US Consumer Price Index (CPI) already showed signs of slowing in its October inflation report. This gave Federal Reserve Chairman Jerome Powell an opportunity to slow the pace of rate hikes and focus on increasing financial risk. The pattern of larger back-to-back rate hikes by the Federal Reserve (Fed) has exposed companies to ignore their monthly obligations due to higher interest payments. Moreover, a slowdown in the pace of interest rate hikes by the Federal Reserve would provide an opportunity to observe the achievements of the efforts made so far to calm inflation.
After Federal Reserve policymakers signaled that a slower pace of interest rate hikes would be optimal, the US dollar is in for a bumpy ride. The US Dollar is expected to fall further to near 3-month lows around 105.34. Contrary to the efficient market assumption, economists at ANZ Bank viewed the move as overdone, as headline inflation at 7.7% is still extremely far from the 2% target rate.
Further tightening of European Central Bank policy to support the euro
Persistent supply chain risks in the Eurozone following Russia’s invasion of Ukraine have accelerated inflation and the risk of a deep recession. Eurozone inflation hit 10.7% and to bring it down, ECB Governing Council member Isabel Schnabel said on Thursday that she will likely have to raise interest rates further into restrictive territory, as Reuters reported. The European Central Bank policymaker further added that the room to slow the pace of interest rate adjustments remains limited. And, the greatest risk for central banks remains a falsely calibrated policy on the assumption of a rapid decline in inflation.
Meanwhile, minutes from the European Central Bank’s (ECB) October policy meeting revealed on Thursday showed that a few members also voted for a 50 basis point (bp) interest rate hike. The Governing Council of the European Central Bank believes that policy tightening could be halted if there are signs of a deep and prolonged recession.
Eurozone gas price cap structure expected
European Union (EU) authorities are considering capping energy prices to protect households from a simple drop in real income. In response to this, Intercontinental Exchange (ICE) warned that finalizing the European gas cap would force energy traders to pay an additional $33 billion in margin payments, as reported by the Financial Times. Such a large increase in margin requirements could “destabilize the market”,
EUR/USD Technical Outlook
EUR/USD plays with the 200-period exponential moving average (EMA) at 1.0389 on a daily scale. The asset’s corrective move after printing a high of 1.0482 on Nov 15 to near 1.0226 was supported by the rising trend line set from the November low at 0.9730 . Looking ahead, potential resistance is plotted from the June 27th high at 1.0615 and the May 30th high at 1.0787.
The Relative Strength Index (RSI) (14) is hovering in a bullish range from 60.00 to 80.00 indicating that the bullish momentum is active.
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