- Federal Reserve chief Powell became even more aggressive with monetary policy.
- The crisis between Russia and Ukraine continues to grow and affects world economic developments.
- EUR/USD hovers around 1.1000 with risk increasingly skewed to the downside.
EUR/USD is hovering around the 1.1000 mark, unable to attract speculative interest during the week. Volatility it has been limited, partly due to a tight macroeconomic calendar, but also amid growing uncertainty about the war. Russia has intensified its attacks against neighboring Ukraine, while a diplomatic solution moves further and further away.
Western leaders keep piling up sanctions against Moscow. NATO announced that it would reinforce its troop presence in the eastern and southeastern parts of its territory, with soldiers from the US, Canada, Germany and the UK.
Eastern nations respond to Russia
US President Joe Biden met with European leaders, G-7 partners and NATO allies on Thursday, then held a press conference at the White House. Among other things, Biden said that he would support Russia’s expulsion from the G-20, adding that he understands that sanctions will not deter Russia, but will ultimately lead to the country stopping the invasion. Finally, he pointed out that the allies are ready to respond if the Kremlin decides to use weapons of mass destruction, although he was reluctant to confirm that the United States will deploy soldiers in Ukraine.
The conflict in Eastern Europe is already affecting the outlook for global growth and inflation is skyrocketing. Central bankers are no longer worried about acting too soon in tightening monetary policies, but instead think it may be too late in this new global scenario.
Tighter Monetary Policies Ahead
The US dollar appreciated on Monday, as chairman of the US Federal Reserve. Jerome Powell he became even more aggressive. speaking of the economic prospects At the National Association for Business Economics’ Annual Economic Policy Conference, he said “inflation is too high” and the central bank will respond accordingly. Powell joined the 50bp hike club as several Fed members signaled they would support such a move from May. He noted that his plans to reduce the balance would likely be completed at the next meeting, although he did not say when they would begin to reduce it.
Powell’s words triggered a sell-off in government bonds, sending yields to their highest level since May 2019. Yields pulled back as days went by, but ended the week higher.
In Europe, the European Central Bank continues to slowly abandon its patient stance. After President Christine Lagarde surprised with some aggressive comments at the last meeting, several ECB Members have hinted at a possible rate hike in the EU before the end of the year. The central bank has already announced that it will stop its bond purchases ahead of schedule, now scheduled for the third quarter of the year.
The objective of the US Federal Reserve is to achieve maximum employment and price stability, while the ECB’s commitment focuses solely on price stability. Inflation in the US and EU is at multi-decade highs and rising, as economies slowly recover from the massive lockdowns that hit the world at the start of the pandemic.
Speaking of which, a new wave of coronavirus is spreading rapidly in Europe. A new strain, called Omicron BA.2, is causing record infections in Germany, but cases are also on the rise in the UK, France, Italy, Austria, among other countries. Until now, governments have refrained from deciding on new restrictions, but the possibilities are increasing. However, it seems unlikely that countries will return to lockdowns unless health systems start to collapse.
Stable growth, but for how long?
On the data side, Markit released preliminary estimates of March PMIs. EU readings surprised to the upside, hinting at continued economic progress despite the war. It’s worth noting that the April figures may be a huge disappointment. The German IFO survey showed that the business climate deteriorated to 90.8, worse than expected.
US figures were mixed. February Durable Goods Orders fell 2.2%, much worse than the -0.5% expected. Markit’s preliminary estimates of the US March PMIs were upbeat, while initial jobless claims for the week ending March 18 fell to 187,000, beating expectations. Finally, the Michigan Consumer Sentiment Index for March was confirmed at 59.4-
Next week will be a bit busier as it will include the final March consumer price index readings from Germany and the EU and the final Q4 reading from the US. Gross domestic product. Finally, the US will release monthly employment figures on Friday. The Nonfarm Payroll Report is expected to show the country added 450,000 new jobs in March, while the unemployment rate is expected to be 3.7%. In addition, the country will release the ISM Manufacturing PMI for March.
EUR/USD Technical Outlook
The EUR/USD pair is bearish according to the weekly chart as it shows that the price remains well below all of its moving averages. The 20 SMA is heading firmly lower, now a handful of pips above the 61.8% retracement of this year’s decline. Technical indicators, meanwhile, remain aimless within negative levels.
The 23.6% retracement of the same rally provided weekly support at the 1.0960 price zone, the main area to beat for the bears. Once below the latter, the pair could retest the year’s low at 1.0805.
The daily chart shows that the bearish 20-day SMA that rejected the bulls throughout the week now maintains its downward slope around 1.1015. The Momentum indicator is trading within positive levels, diverging from the RSI indicator, which is heading lower around 43. The bulls may have better chances if the pair recovers beyond 1.1070, the 38.2% retracement of the aforementioned drop, with room to extend gains towards the 1.1150 price zone.
EUR/USD Sentiment Survey
According to the FXStreet Forecast Survey, the EUR/USD pair will remain under pressure in the short term, but could make up some ground afterwards. The bears represent 50% of the experts surveyed in the nearest perspective, with an average target of 1.0979. Bulls are a 58% majority in the monthly view, targeting the 1.1100 price zone. Finally, the quarterly view suggests that the pair will remain within the 1.09/1.11 price zone, with bulls outperforming bears.
The overview chart indicates that the bears are holding on. All three moving averages under study point lower, with uneven strength. More relevant, the same graphic it shows that the number of those betting on possible targets below 1.1000 continues to rise and that the pair has a chance to hit new 2022 lows.