EUR/USD has traded in a range for most of the month and is seen trading in an even more narrow range in the week thus far. Fed Chair Powell will be speaking later today and his words could trigger a directional move in the currency pair.
Powell is expected to shed light on how the Fed will handle monetary policy and inflation moving forward. Considering the earlier easing measures to battle the Coronavirus, both fiscal and monetary, inflation is likely to rise.
If the Fed decides to let inflation overshoot for some time, it would be bearish for the dollar. Typically, as inflation rises, a rate hike is expected which strengthens the currency.
But because of a prolonged period where inflation has been running below targets, and as the economy is still recovering from the virus outbreak, monetary policy could remain accommodating for an extended period of time.
The situation in Europe differs if taking into account comments from an ECB member yesterday. Governing council member Peter Kazimir said on Wednesday that the European Central Bank is “not obliged to use the whole (PEPP) envelope”. In other words, policymakers may not use all of the funding already allocated for easing.
It’s only a matter of time that EUR/USD breaks out of its range and there should be some follow-through in whichever direction the pair heads, at least initially.
Whether the pair starts a new sustained directional move might depend entirely on what Powell says today.
If the markets perceive him to be less dovish than expected, there could still be an upside move but sellers might try and defend the 1.20 area. Effectively limiting gains.
The risk here is if Powell is a bit hawkish. It would be unexpected and would catch the markets off guard. In such a scenario, the dollar could rally notably.
- EUR/USD has held in a range between 1.1735 and 1.1947 for most of the month. This range could be broken later today after Powell’s speech.
- Unemployment claims and a revised estimate of GDP figures for the US will be released in the early North American session.
For a look at all of today’s economic events, check out our economic calendar.