- EUR/USD displayed a solid recovery from 1.0600 as investors underpinned the risk-on market mood.
- The USD Index corrected as investors digested the hawkish Federal Reserve minutes.
- European Central Bank is eyeing a continuation of 50 bps rate hike spell.
- EUR/USD is auctioning in a Symmetrical Triangle that conveys volatility contraction.
EUR/USD has stretched its recovery above 1.0620 in the early European session as the risk-taking ability of the market participants has improved firmly. The major currency displayed a confident recovery move from the round-level support of 1.0600 as investors digested the uncertainty associated with the context of policy tightening continuation by the Federal Reserve (Fed) to tame sticky inflation.
S&P500 futures have shown sheer volatility in its recovery move after a rangebound Wednesday, portraying the risk-appetite theme. The positive market sentiment has resulted in a correction in the US Dollar Index (DXY) to near 104.00. At the time of writing, the USD Index is attempting a revival.
The market mood could dampen as geopolitical tensions have not eased yet. China’s top diplomat Wang Yi said on Wednesday that they are ready to deepen strategic cooperation with Russia, as reported by Reuters. He further added, “Our relations will not succumb to pressure from third countries.” Earlier, the US ambassador to the United Nations, Ambassador Linda Thomas-Greenfield, said China would cross a “red line” if the country decided to provide lethal military aid to Russia for its invasion of Ukraine.
Investors ignore hawkish FOMC minutes
The message from the Federal Open Market Committee (FOMC) minutes that the policy tightening spell will continue as a three-month decline in the United States Consumer Price Index (CPI) is insufficient to infuse confidence among the Federal Reserve policymakers that inflation will come down in an expected manner.
Federal Reserve chair Jerome Powell and other policymakers believe that the upbeat labor market and a recovery in the January Retail Sales data could trigger a revival in the US CPI ahead. The FOMC minutes conveyed that two policymakers Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard were not in favor of slicing the extent of the interest rate hikes again. In its December monetary policy meeting, the Federal Reserve trimmed the policy tightening pace to 50 basis points (bps) after hiking interest rates four times consecutively by 75 bps.
Talking about the external forces, the Federal Reserve believes that the rollback of pandemic controls by China and the ongoing Russia-Ukraine war could also accelerate the price index in the US.
European Central Bank sets to raise rates by 50 bps in March
In Eurozone, price pressures have fallen at a decent pace in the past few months after the continuous policy tightening by the European Central Bank (ECB). The central bank has already pushed interest rates to 3% in its February monetary policy meeting and further rate hike are on the table. No doubt, the price index is responding effectively to the restrictive monetary policy but a pause at this time could be a premature decision.
European Central Bank President Christine Lagarde in his speech on Tuesday announced that the central bank is ready to hike interest rates further by 50 bps to 3.50% in March. The economy has managed to dodge the recession in CY2022 and now a decent recovery in Eurozone makes the decision of further rate hikes more constructive.
Meanwhile, Goldman Sachs has come forward with an interest rate projection for the European Central Bank. The investment banking firm said in addition to an increase of 50 basis points in March and 25 basis points in May, it was estimating a 25 basis-point hike in June.
EUR/USD technical outlook
EUR/USD is continuously facing barricades around the 61.8% Fibonacci retracement (placed from January 6 low at 1.0483 to February high at 1.1033) at 1.0693. The formation of the Symmetrical Triangle chart pattern is indicating a volatility contraction in the asset.
The 20-period Exponential Moving Average (EMA) at 1.0633 is overlapping with the asset price, which indicates a rangebound performance ahead.
Meanwhile, the Relative Strength Index (RSI) (14) has not slipped confidently into the bearish range of 20.00-40.00 yet. Therefore, a bearish momentum has not been activated yet.