09.02.2023 09:00 AM
EUR/USD: the dollar is aware of inflation risks, and the euro's far from hitting highs

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The US currency remains neutral after Federal Reserve Chairman Jerome Powell's speech. However, at any moment, the USD could face increasing risks. The European currency is trying to rise to new peaks again, but is falling back to its previous positions.

The speech of Powell was the milestone event of the week. As a result of this meeting, the greenback's reaction was mixed: from explosive growth to a deafening drop. EUR/USD fell to 1.0670, and corrected to 1.0765 after Powell's speech. According to analysts' observations, the current rebound was large - within one figure. Then the pair returned to the lower limits of the range, reaching 1.0730. On Thursday morning, February 9, EUR/USD was trading at 1.0739, trying to overcome the price barriers.

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Against this backdrop, experts admit a curtailment of risk appetites in the market. Such a reaction has been repeatedly recorded following the Fed meeting: in the first hours after Powell's speech, markets rose and then promptly fell. In such a situation, analysts expect the EUR/USD pair to make new lows and to move to the low of 1.0500 in the mid-term.

Economists at Rabobank maintain their three-month EUR/USD forecast of 1.06. "On the back of the remarks from Powell, Friday's labor data release and our ongoing concerns surrounding the impact of tight labor market conditions, we have revised up our forecast for the top of the target range for the Fed funds rate to 5.5% from 5.0%. This underpins our expectation that EUR/USD will dip back to 1.06 on a three-month view and potentially to 1.03 in six-months."

"Given that the market is positioned long EUR, we expect the upside for the EUR to remain capped." Against this background, the euro's growth will be limited, analysts believe. The current dynamics of the greenback and the euro will be seriously affected by the macro data from the US and Germany, which will take place on Thursday, February 9. The markets will focus on the upcoming reports on the number of initial jobless claims in the US. According to preliminary estimates, this figure increased by 7,000, reaching 190,000.

The Fed's current monetary policy is still important to market participants. Traders and investors are expecting another key rate hike next month. Most analysts (90.8%) agree with them and expect an additional rate hike of 25 bps (to 4.75%-5%).

The Fed chair did not mention anything new about the current monetary policy, but stressed that the central bank's position remains hawkish in many respects. Powell said that he expects to see declining inflation in housing soon, but noted that prices remain stubborn for services. As for the U.S. labor market, it remains strong. The agency assumes that the employment rate in the U.S. will stabilize and it will be possible to restrain inflation without a significant increase in unemployment.

At present, the Fed is focused on restoring price stability, Powell said. At the same time, restrictive monetary policy must be maintained in order to normalize the situation. "What we said at the meeting was, was that ongoing rate increases will be appropriate," the Fed chairman added.

The financial markets remain uncertain as to whether the Fed will be able to achieve its 2% inflation target without harming the labor market and economic growth. Earlier, the Fed chair said that the agency controls the current level of inflation, as well as "has the tools to achieve our 2% goal over time." "We're trying to achieve a stance of policy that is sufficiently restrictive to bring inflation down to 2% over time, and we don't think we've achieved that yet," Powell said.

"Inflation in the United States is closely related to things that happen here, including the balance between supply and demand," Powell said. "While inflation remained elevated, we are seeing encouraging signs that supply-demand mismatches are now easing in many sectors of the economy," U.S. Treasury Secretary Janet Yellen said. Against this backdrop, the Fed's positive statements give market participants confidence. "The Fed has the ability to shield the financial markets or the economy from the consequences of moving too slow," Powell concludes. In the current situation, analysts expect the greenback to strengthen and the euro to stabilize.

Larisa Kolesnikova,
Analytical expert of InstaForex
© 2007-2023
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