Forex world

December 08, 2022

EUR/USD hovers around 1.0500

- EUR/USD is oscillating around 1.0500 as investors await a speech from European Central Bank’s Lagarde.

 -Uncertainty over the Federal Reserve policy outlook has muddled investors’ sentiment.

- The speech from Christine Lagarde will trim obscurity over interest rate policy.

- EUR/USD is expected to continue its sideways auction profile amid a quiet market mood.

EUR/USD is failing to sustain above the psychological support of 1.0500 in the Tokyo session. The major currency pair is struggling to hold its reins amid a cautious market mood. Rising fears of a recession in the United States economy are compelling investors to safeguard themselves behind the US Dollar.

Meanwhile, the shared currency bulls are getting anxious ahead of the speech from European Central Bank (ECB) President Christine Lagarde, which is scheduled for Thursday. At the time of writing, the US Dollar Index (DXY) extended its recovery to near the bewildering resistance at 105.40. S&P500 futures continue to remain sideways as the upside has been restricted by soaring recession fears.

The return on US Treasury bonds has recovered sharply as the Federal Reserve (Fed) is preparing to hike interest rates further next week. The 10-year US Treasury yields have climbed above 3.47% after diving near 3.40%.

Uncertainty over the Federal Reserve policy outlook muddles market mood

Market mood is displaying mixed responses as investors are confused whether to cheer strength in the United States economy supported by a tight labor market and firmer demand in the service sector or to turn cautious on expectations of a higher interest rate peak to contain fresh evidence of a reversal in inflation.

The upbeat demand for manpower is indicating that the inflationary pressures are here to stay as strong demand for labor meets with higher salaries. This will left more money in the palms of households, which will result in higher retail demand and therefore will trigger inflation ahead.

Therefore, Federal Reserve policymakers are pressuring for a higher interest rate peak rather than a continuation of the current rate hike pace to unbundle the inflation mess. Expectations for a higher neutral rate have triggered recession fears. Bank of America (BoA) CEO Brian Moynihan told investors at a Goldman Sachs financial conference that the United States economy will show "negative growth" in the first part of 2023, but the contraction will be "mild."

A prolonged decline is expected in the US Dollar

Expansion in recession fears in the United States economy has set a bullish ground for the US Dollar in the short-term. A report from ING states that as long as the Federal Reserve will remain hawkish, US Dollar will remain strong. Current recessionary fears have built a positive environment for the Dollar and a negative one for commodity and pro-cyclical currencies.

Also, economists at the National Bank of Canada believe that the greenback could recover some ground in the near term. On a longer horizon, they have a different opinion that a policy change from the Federal Open Market Committee (FOMC) in the first quarter of 2023 would set the stage for a more prolonged decline in the Greenback.

Speech from European Central Bank President will trim obscurity over interest rate policy

Going forward, investors will keep an eye on the speech from European Central Bank President Christine Lagarde for fresh impetus. The speech from Christine Lagarde will provide cues about the likely monetary policy action for December monetary policy meeting.

Eurozone headline inflation has displayed a plunge in its preliminary November report. However, a one-time slowdown in the inflationary pressures is not sufficient to call for policy change but requires deceleration in the inflation report continuously for a few months. A survey conducted by the European Central Bank dictates that 12-month inflation expectations have accelerated to 5.4% from the prior consensus of 5.1%. While, for a three-year period, forward inflation is unchanged at 3.0%. To offset the increment in one-year inflation expectations, a hawkish commentary is expected from ECB’s Lagarde.

EUR/USD technical outlook

EUR/USD is holding itself above the upward-sloping trendline placed from November 3 low at 0.9730 on a four-hour scale. The 50-period Exponential Moving Average (EMA) at 1.0465 is acting as a major cushion for the major currency pair.

Meanwhile, the Relative Strength Index (RSI) (14) has shifted into the 40.00-60.00 range, which indicates a consolidation ahead.

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