EUR/USD falls below 1.1250 as traders increase hawkish Fed wagers and risk appetite returns.
The EUR/USD has been under pressure in recent trade as the market’s overall appetite for risk has increased. In recent activity, the pair fell below 1.1250 and briefly surpassed last Tuesday’s post-hawkish Fed Chair Jerome Powell speech lows of 1.1235. At current prices, EUR/USD is down around 0.4 % on the day, making the euro the joint worst performing G10 currency on the day, along with the Swedish krona. In the coming sessions, the bears will most likely be searching for a retest of recent annual lows under 1.1200.
Improving risk appetite has been the primary driver of the EUR/downward USD’s movement on Tuesday. Traders and experts attribute the broad turnaround in sentiment to receding Omicron fears and Chinese stimulus prospects, which saw the S&P 500 open 1.2 % higher and the Stoxx 600 index trade nearly 2.0 % higher on Tuesday. Market players appear to be warming to the concept that the Omicron variation induces lesser symptoms than previous Covid-19 variants, posing less of a hazard to the economy.
As a result, expectations for the Fed to tighten monetary policy in 2022 have widely returned to pre-Omicron levels. On Tuesday, the implied yield on the December 2022 three-month eurodollar futures jumped up to 1.05 % , up from less than 1.0 % at the start of the week and as low as 0.8 % at the end of December. In the absence of any significant US data releases or Fed commentary (Fed members are in lockdown ahead of next week’s meeting), this recent repricing is plainly a product of the market’s improved risk appetite.
The fundamental topic driving the EUR/USD in the medium term remains central bank policy divergence. Another increase in US Consumer Price Inflation (CPI) statistics towards the end of the week might cement market expectations for the Fed to agree to quicken the pace of their QE taper beginning in January, weighing on EUR/USD further. However, recent ECB-related news is interesting.
Robert Holzmann, a hawkish ECB member, recently stated that inflation will most likely exceed the bank’s 2.0 % objective in 2022, significantly beyond the bank’s current prediction of 1.7 % inflation next year. Madis Muller, another hawk, had similar concerns. Meanwhile, according to ECB insiders, officials are second-guessing previous vows to continuing support in the face of higher-than-expected inflation. In terms of QE, some authorities are said to be hesitant to commit to anything beyond the end of Q2 2022. If it is revealed that the ECB will not raise the APP to compensate for the end of the PEPP in March next year, as appears increasingly likely, the euro may strengthen against the low-yielding yen and Swiss franc, but not against the USD, given that the Fed will, in any case, remain far ahead of the ECB in terms of monetary normalisation.
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