Market Focus: Fed Rate Guidance and ECB Inflation Concerns Drive EUR/USD and US Dollar Index Movement

Posted Tuesday, March 7, 2023 by
Arslan Butt • 2 min read

The EUR/USD has made a small gain in the Asian session, moving up from 1.0680 and nearing resistance around 1.0700. Investors are feeling more optimistic about risk, leading to a rise in the major currency pair’s value. This is due to investors discounting the risk of a US recession, thanks to the Federal Reserve’s increased interest rates.

The US Dollar Index (DXY) becomes vulnerable above 104.20, and a decline in safe-haven attraction is expected to drive it down. S&P500 futures also show modest gains, suggesting that the market sentiment is positive. Increased risk appetite has led to demand for US government bonds, causing the 10-year US Treasury yield to fall to 3.96%.

Investors are eagerly anticipating a speech from European Central Bank President Christine Lagarde, expecting an aggressive stance. Fed Chairman Powell’s testimony will also provide guidance on interest rates.

While inflation remains a concern, the Federal Reserve is committed to raising interest rates to stabilize prices. However, comments from Fed Governor Christopher Waller have eased concerns about aggressive instructions, stating that inflation pressures will begin to decline in the coming months.

Experts believe that Fed Chairman Powell will review additional data before committing to further rate hikes. The American labor market will be a crucial factor in future Fed actions. This week, investors will be paying attention to employment statistics, particularly the Employment Change statistics reported by US Automatic Data Processing (ADP). The US Bureau of Labor Statistics will also release Nonfarm Payrolls (NFP) and Unemployment Rate data, with rising earnings potentially leading to tighter monetary policies and a stronger US Dollar.

Meanwhile, the possibility of inflationary pressure in the Eurozone is raising concerns, with ECB President Lagarde declaring a 50 basis point rate hike at the March monetary policy meeting. However, ECB policymaker Mario Centeno has expressed reservations about this decision, stating that it must be based on data. Lagarde’s speech on Wednesday will provide further clarity on the ECB’s stance.

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