November 10, 2023 - Written by Ben Hughes
STORY LINK Euro to Dollar Rate: EURUSD Retreats as Fed’s Powell Maintains Hawkish Stance
Hawkish Fed rhetoric pulled the Euro (EUR) lower against the US Dollar (USD) on Thursday and CIBC expects the currency pair will weaken further to 1.03 at the end of 2023.
At the time of writing, the Euro to Dollar exchange rate (EUR/USD) traded at 1.06699
In a speech on Thursday, Federal Reserve Chair Powell stated that the central bank is not confident that it has achieved a sufficiently restrictive stance.
He added that the Fed is attentive to the risks that stronger growth could undermine inflation progress which could warrant a monetary policy response.
Markets are still confident that there will be no rate hike at the December meeting, especially as Powell stated that the Fed would continue to move carefully.
The main impact was a dip in expectations that rates could be cut in the first half of 2023.
The dollar secured net gains after the comments with EUR/USD retreating to 1.0675 from earlier highs at 1.0725.
GBP/USD also dipped to near 1.2230 with USD/JPY advancing to 151.30.
US initial jobless claims increased slightly to 217,000 in the latest week.
Continuing claims increased to 1.83mn in the latest week from a revised 1.81mn previously and this was the highest level since May which suggests that demand for labour is weaker.
CIBC noted; “there are still some signs of dissonance in certain corners of the market. Indeed, futures markets are still keen to price in close to 100bps of easing from the Fed by the end of 2024. That compares to 77bps for the Bank of Canada, and 76bps for the Bank of England.”
It considers that markets will have to adjust expectations further; “The implication is that the market expects the Fed to be more reactive than other central banks over the coming year. But that doesn’t jive with the fundamentals on the ground.”
MUFG expects that central banks will be very wary over raising rates further which will curb volatility.
MUFG still expects the Fed to stay on hold; “We would be surprised if the recent drop in yields was sufficient to make the Fed signal with more confidence again that they plan to hike in December.”
Fed rhetoric will continue to be monitored closely.
On Thursday, Richmond Fed Chair Barkin stated; “I do anticipate some sort of a slowdown, as I just have to believe the net impact of all this tightening will eventually hit the economy harder than it has."
He added; "Whether a slowdown that settles inflation requires more from us remains to be seen, which is why I supported our decision to hold rates at our last meeting."
The Euro will continue to be hampered by a lack of confidence in the Euro-Zone economy.
According to Simon Harvey head of FX analysis at Monex Europe; “The fundamentals of the European economy don't warrant euro/dollar trading at current levels, so if we do get push back from Powell, that's where there will be the most pain."
Traders are betting that the ECB will cut rates by around 90 basis points by the end of next year, from 4.0% currently.
Euro-Zone inflation pressures and ECB rhetoric will continue to be monitored closely.
Jussi Hiljanen, head of rates strategy at lender SEB, said: "2024 will be the real test on whether inflation continues to decline at a pace that warrants such early rate cuts that markets are pricing."
According to Scotiabank; “Trend momentum signals remain bullishly oriented on the intraday and daily studies but intraday trend strength has softened.”
It added; Risks remain geared to more EUR strength above while 1.0650/1.0660 support holds, EUR gains should pick up a bit more momentum above 1.0710/1.0720.”
Socgen considers that dollar bears will remain cautious; “Last week’s data has done a lot to persuade me that the US economic cycle has finally turned, and the peak for both Dollar and 10-year yields is in, but it’s clear that the market collectively is very worried about being caught out again.”
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TAGS: Daily Currency Updates Euro Dollar Forecasts