Euro Cautiously Higher As Mr Powell Heads to Capitol Hill

EUR/USD news and analysis

• EUR/USD Focusing on congressional testimony
• The Fed paused high rate Course, the European Central Bank has not
• euro/American dollar was tracked GBP/USD Strong following in the UK economic inflation data

The euro traded cautiously against the US dollar on Wednesday, with a slightly subdued move across the currency complex as markets await congressional testimony from Federal Reserve Chairman Jerome Powell.

He will be on the podium on Capitol Hill later in the day and markets will be eager to see how hawkish he gets when he gets there. The Fed chose to halt a long and historic series of interest rate hikes this month. However, with inflation still well above target, if it behaves a little better than it is across the Atlantic, there will certainly be a resumption, perhaps very soon.

In fact, the market is looking forward to another quarter-point increase this year, while the Fed’s guidance suggests it could be two points. Investors will look for guidance later on Wednesday. Powell has already pointed to stubborn inflation and the continued tightness of the domestic labor market as reasons that could increase borrowing costs.

In Europe, the case for raising interest rates is even clearer. Consumer price inflation is more than three times the ECB’s 2% target, with essentials such as food priced well above that.

The European Central Bank raised its main interest rate to 4% this month, and President Christine Lagarde said another increase next month would be appropriate given that inflation has been too high for too long.

Of course, the Fed acted before the ECB, and took more action, but the likely current interest rate path looks quite supportive of the single currency.

However, the underlying picture is much less so, with Germany, the powerhouse in the Eurozone, already stuck in a technical recession. That country’s respected Ifo economic institute said on Wednesday that the downturn could be deeper and longer than first thought given the detrimental effect of inflation on private sector demand.

EUR/USD may also trail GBP/USD higher. The British Pound saw further strong gains after the official inflation data from the UK came out strong, which essentially led to another drop in interest rates.

Technical analysis of the EUR/USD pair

Chart compiled using TradingView

The EUR/USD bears are still stymied by the sharp ascending trend line that has supported the market since June 7th.

This has its basic roots in the comparison between that pause of the Federal Reserve and the European Central Bank’s determination to continue higher.

However, the trend is under renewed pressure and now offers support very close to the current market at 1.0895.

The Euro bulls are holding quite a strong defense of the 1.09 psychological support area, but if the trend line gives way on a daily closing basis, the strong gains seen on June 15th will be in focus, with that day’s opening low at 1.07989 likely in the spotlight. Light ahead of the big dips that occurred in late May.

If the pair can consolidate above 1.09, the bulls may feel emboldened to attempt an early May high of 1.10496, itself a 13-month high. They have a bit of work ahead of that, to comfortably recover the pair within the wide trading range that supported the latest attempt at that peak.

At the moment, it is obviously crashing to the bottom of that range and may not hold there as it fizzles out this week. The endurance of this short-term trend line appears to be key to the trend now.

Sentiment towards EUR/USD is probably quite evenly divided according to IG’s trading metrics. There is a moderate bearish bias at current levels but the market does not seem to be overly convinced.

– By David Cottle for DailyFX