The euro edged lower on Wednesday and was 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 released PMI reports for March on Thursday, with the markets having been braced for the downturn. Manufacturing PMI was expected slow to 55.8, down from 58.4, while Services PMI was forecast to drop from 55.8 to 53.8 points. Eurozone PMIs were 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 signaled weaker economic activity and could weigh on the euro.
EUR/USD Technical
- 1.0923 was the first line of support, followed by 1.0794
- 1.1030 was a weak resistance line. Above, there was resistance at 1.1159
