Euro drifting ahead of ECB meeting

The euro is showing limited movement on Thursday, ahead of the ECB rate meeting. In the European session, EUR/USD is trading at 1.1000.

Euro jumps on dovish Powell

Investors liked what they heard from Jerome Powell at the Fed meeting, which sent the US dollar broadly lower. The euro took full advantage and climbed 1.16% on Wednesday. The Fed raised rates by 25 basis points as was widely expected. The Fed noted that inflation has eased but reminded listeners that it remained much higher than the 2% target. Jerome Powell signaled that more rate hikes are coming and said he did not expect to cut rates this year. This was essentially a repeat of the hawkish message we’ve grown accustomed to hearing from the Fed, but some comments from Jerome Powell struck a positive chord with investors. These included Powell acknowledging that the disinflation process had started and that he expected another couple of rate hikes before winding up the current rate-hike cycle.

Besides inflation, the Fed is focused on employment data, which will make Friday’s nonfarm employment report an important factor in the Fed’s rate plans. In December, nonfarm payrolls fell from 256,000 to 223,000 and the downturn is expected to continue, with an estimate of 190,000 for January. This release could result in further volatility in the currency markets on Friday.

The ECB makes its rate announcement later today and is expected to deliver a 50-bp increase, bringing the cash rate to 3.0%. After that, the pace of monetary tightening will depend largely on the strength of the eurozone economy and inflation levels.  The markets are forecasting a terminal rate in the range of 3.25%-3.75%, with the ECB likely to raise rates in 25-bp increments. There has been criticism of the central bank for not communicating effectively with the markets and Lagarde & Co. will have the opportunity to redeem themselves at today’s meeting.

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EUR/USD Technical

• There is support at 1.0921 and 1.0878
• EUR/USD is testing resistance at 1.1016. Above, there is resistance at 1.1205

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