EUR/USD has been moving higher in recent trade, unfazed by a massive beat on expectations from the latest US ADP employment report that adds upside risk to Friday’s official US jobs report, and seemingly garnering impetus from hawkish ECB speak. The pair is currently trading at session highs in the 1.1320s, up more than 0.3% or roughly 40 pips on the day, as it continues to rebound from Tuesday’s sub-1.1280 lows. The pair is now roughly 0.5% above these levels and also back to the north of its 21-day moving average which currently resides at 1.1305. Short-term bullish speculators may be betting that EUR/USD retests the top of the 1.1240-1.1380ish range that has contained it since the end of November. Further resistance will come into play in the 1.1360s in the form of the 1.1360s.
In terms of the major fundamental catalysts of the day; ECB’s Martins Kazaks (the Lithuanian central bank head) hawkishly warned that if the inflation outlook picks up, the ECB is ready to raise rates and cut stimulus and that an early 2023 rate hike is a possible scenario. One would assume that the outlined scenario also includes the axing of the bank’s Asset Purchase Programme, which is currently scheduled to continue in perpituity at a rate of EUR 20B per month from Q4 2022. A throng of ECB members have in recent weeks warned of upside risks to the bank’s 2023 and beyond forecasts. It seems that in the case of further upwards revision to the bank’s inflation forecasts, it would take increasingly less to convince a majority of ECB policymakers that monetary policy tightening is needed.
The above hawkish rhetoric seems to have contributed to euro strength on Wednesday, while the latest much stronger than forecast ADP report has been ignored. The failure of USD to strengthen could be a reflection of fears that tight US labour market conditions encourage the Fed to tighten stimulus in the near-term at a faster pace (referred to as “front-loading” its hiking cycle). Though long-term bond yields are higher on the week, they remain well below the Fed’s estimate of the neutral level which presumably the Fed hopes it will be able to get rates back to in the long run.
Perhaps markets remain fearful that a more front-loaded tightening of policy will hamper long-term growth and the ability of the Fed to get rates back to neutral in the long run. FX strategists have suggested that for the dollar’s bull-run to continue, longer-term US bond yields will need to move towards the sort of levels where the Fed currently thinks it will be taking rates too. In the meantime, the Fed 2022 tightening story will receive further inputs this week in the form of the minutes of the hawkish December FOMC meeting, which may contain chatter at the timing of a first hike and quantitative tightening. Meanwhile, Friday’s US labour market report is likely to point to hot pre-Omicron labour market conditions, as the JOLTs and ADP reports have done.
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