Euro rally fizzles after hawkish Fedspeak

The euro has run out of steam, after an impressive two-day rally that lifted EUR/USD by 2%. On Tuesday, the euro is unchanged at 1.0734.

There are no major releases out of Europe or the US today, which could mean a quiet day for the euro. The only event of note involves Fed Chair Powell, who will participate in a panel at the Swedish Riksbank’s symposium on central bank independence. Powell may not touch on US rate policy, but investors should be on the alert in case he makes any important comments.

Fed members send hawkish message

The Fed remains at odds with the markets over rate policy, with the markets pricing in a terminal rate of 4.93% while the Fed dot plot indicates a terminal rate of 5-5.25%. The markets have stubbornly clung to a more dovish forecast, but the Fed continues to churn out its hawkish message. On Monday, two non-voting FOMC members reiterated the Fed’s stance, saying that rates would likely rise above 5%. Atlanta Fed President Rafael Bostic said he expected rates to remain above the 5% level for “a long time” and that he would put rates on hold throughout 2024. Bostic added that if Thursday’s inflation data showed inflation easing, it would strengthen the case for reducing the rate hike at the February meeting to 25 basis points. San Francisco Fed President Mary Daly echoed this stance, saying that holding rates at its peak for 11 months was a “reasonable starting point.”

The US releases the December inflation report on Thursday, and the release could play an important role as the Fed must decide whether to raise rates by 25 or 50 basis points at the February meeting. The markets have priced in a modest 25-bp move at 77%, versus 23% for a 50-point move. With the US economy showing signs of slowing down, such as Friday’s drop in wages and the Services PMI, there is growing speculation that a rate hike in February could be a “one and done”, with a cut in rates late in 2023.

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EUR/USD Technical

• EUR/USD has support at 1.0711 and 1.0612
• There is resistance at 1.0800 and 1.0953

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