EUR/USD back to 0.95? Could the euro retest 20-year lows?
13:16, 3 November 2022
A strong flash of main beam from the FOMC last night turned USD green though stocks, perhaps predictably, glowed red in return. The Fed’s stalk push-pulling drew some initial market dazzle but the aggressive signalling message, got through: the Fed isn’t done with inflation.
A jumbo 75-point rate rise last night updated the Fed's intentions. This morning DXY accelerated higher, up 0.71% to 112.91. ECB utterances though this morning continued to turn EUR, already down 3% in the last seven sessions alone, a sourer shade of red.
ECB president says recession alone won't tame inflation – what does this mean for EUR?
EUR on dip
As the Fed funds rate reprices higher for the next 12 months and Treasury yields climb in response, USD has the octane edge says Capital fx strategist Piero Cingari.
Especially true, he points out, with moves against EUR “given the most recent ECB meeting was actually more dovish than anticipated”.
What is your sentiment on EUR/USD?
EUR brief low-down – Piero Cingari
- An increase – likely – in the short-term yield differential between US Treasuries and German bonds will exert downward pressure on EUR/USD – and upward pressure on DXY.
- The DXY index has a high level of correlation with the yield on the 2-year Treasury note.
- As Powell indicated that interest rates would be higher than the FOMC’s September predictions (4.6%) and would be maintained at a restrictive level for longer, a new upward repricing of US short-term Treasury yields could occur shortly.
Yet this morning ECB president Christine Lagarde told a conference in Riga that the ECB would throw ‘all instruments in its toolbox’ to hit a 2% inflation medium term target.
Might a recession – Eurozone manufacturing has contracted for a fourth month – help with the tool flinging? Equals Money market strategist Thanim Islam doesn’t reckon so, even as ECB rates push higher.
“ECB President Lagarde [herself] commented that a recession will not be enough to tame inflation – suggesting [the] ECB [is] willing to risk economy going into a recession.”
Despite the ECB rhetoric EUR looks incapable of drawing meaningful advantage.
More dot-plotting – and a deeper descent?
ING fx experts think the balance of risk still favours USD “particularly against European currencies where our macro team see growth substantially below consensus over coming quarters”.
In practice? It means EUR/USD can still make the run towards 0.95 in the coming months while USD/JPY can still retest 150, they think. Meanwhile morning’s Bank of England monster 75bps rise to 3%, the biggest lift in several decades, matches the ECB’s rate hike last week as well as yesterday’s Fed move.
Any bright spots? Not really though the euro area saw seasonally-adjusted September unemployment slip to 6.6%, down from 6.7% in August 2022 and substantially lower compared to 7.3% a year earlier.
The bearish tone is set in just about every direction – and inflation is proving much harder to unstick. “A strong non-farm payroll figure on Friday,” adds Cingari, “and another strong US inflation reading next week will cement the Fed’s hawkishness and might push the US dollar index (DXY) to fresh yearly highs and EUR/USD down to 0.95 or below.”
Fx Strategist And Finance Consultant At Keirstone, Francis Fabrizi
- EUR/USD started the day bearish this morning. “We saw EUR/USD pullback to the 0.9975 resistance level yesterday following the US interest rates announcement. Price is now attempting to reach the 0.9705 support level.
- “If it is successful in falling below this barrier, I expect 0.9550 will be the next target. If price is unable to hold below 0.9705, it is likely it will try to retest 0.9975.”
- “Looking at this pair on longer timeframes, I believe it is still very bearish and we will see price reach 0.9330 in the coming weeks if price continues to gain greater bear pace.”
A little after 1pm DXY was 0.87% up at 112.69 while GBP/USD had crashed 1.86% to 1.1184; EUR/USD was 0.7% down at 0.9753; USD/JPY was 0.28% up at 148.26.
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