EUR/USD Steady after Wednesday’s Powell-Inspired Advance

EUR/USD Analysis

The European Central Bank raised rates last week by 25 basis points and President Lagarde signaled further tightening ahead. She stressed that policymakers are "not satisfied" with the inflation outlook, noting that they "are not at destination" and that they have "more ground to cover". ^[1]

A day earlier, the Fed had stayed on the sidelines, keeping rates at 5.00-5.25%, after ten consecutive increases. However, officials upgraded their views on the appropriate policy path, now projecting a median terminal rate of 5.1%, which implies another 50 basis points worth of hikes. ^[2]

During his post-decision press conference, Chair Powell had downplayed these forecasts, but appeared more hawkish on Wednesday's testimony to the House of Representatives. He refrained from speaking about a pause and said the two more hikes suggested by the latest projections, is a "pretty good guess" of what will happen if the economy evolves as expected. ^[3]

EUR/USD comes from its best week of the year, boosted by the increasing divergence between the Fed and its European counterpart following the latest policy meetings. Even though Mr Powell sounded hawkish yesterday, he still did not commit to two more rate rises and his remarks consolidated the rift between the two central banks.

The common currency jumped on Wednesday and closed above the daily Ichimokou Cloud. This brings April's 2023 highs in the spotlight, but will need fresh impetus for tackling it, while 1.1233 seems distant at this stage.

Today though, EUR/USD is subdued and the advance looks stretched. This creates scope for a slide back towards the EMA200 (1.0840), but further weakness towards 1.0634 is hard to justify under current monetary conditions.

Markets now turn to the second day of Powell testimony and more speeches by other fed officials.