The euro has edged lower on Wednesday and is trading just below the 1.10 level, a psychologically important line.
A tale of two central banks?
The Federal Reserve came out swinging this week, reiterating its pledge to do everything it can to wrestle sizzling inflation back to lower levels. Fed Chair Powell said that inflation was putting the recovery at risk and he was prepared to raise interest rates by 0.50% increments if needed. This is a stridently hawkish message, as the Fed tries to answer criticism that it has been too slow in its response to accelerating inflation.
Powell’s hawkish stance was in sharp contrast to what ECB President Lagarde had to say about monetary policy this week. Lagarde said that the Fed and ECB were moving out of sync, and Lagarde readily acknowledged that the two central banks would be implementing different policies. Lagarde noted that Europe was more exposed to the war in Ukraine than was the US, due to geographical proximity, and the war will have very different effects on the US and on the eurozone, which required different monetary policies.
The tightening we are seeing from the Fed has boosted US Treasury yields, which is widening the rate differential between the US and other major economies. We have seen this most predominately with Japan, where the rate differential has powered dollar/yen above the 121 line. The euro may not react as strongly as the yen has, but the climb in US yields will still weigh on the EUR/USD.
Germany releases PMI reports for March on Thursday, with the markets braced for a downturn. Manufacturing PMI is expected to slow to 55.8, down from 58.4, while Services PMI is forecast to drop from 55.8 to 53.8 points. Eurozone PMIs are also expected to show a slowdown. Although the forecasts still point to expansion, with readings above the 50-level, weaker numbers in both services and manufacturing signals weaker economic activity and could weigh on the euro.
- 1.0923 is the first line of support, followed by 1.0794
- 1.1030 is a weak resistance line. Above, there is resistance at 1.1159
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