The EUR/USD was nearly unchanged on Monday as traders await Powell’s first testimony which is scheduled for Tuesday. Draghi hedged his bets when speaking to the European Parliament on Monday repeating the status quo. The policy path for Powell will likely be the focus of the questions asked to him by Congress, which could be a catalyst in driving the exchange rate.
The EUR/USD attempted to move higher on Monday but ran into resistance near the 10-day moving average at 1.2368. Support on the currency pair is seen near the February lows at 1.22. Momentum remains negative as the MACD (moving average convergence divergence) index prints in the red with a downward sloping trajectory which points to lower prices. The fast stochastic seems to have stabilized and generated a crossover buy signal, pointing to a rebound in the exchange rate.
ECB Draghi hedged his bets at testimony
The central bank head spoke in a hearing at the European Parliament Monday and repeated his central message that growth remains robust, and inflation is slowly returning to target, but with the help from the still very expansionary monetary policy. Indeed, the ECB’s position is that policy will remain supportive even after the end of net asset purchases, as the central bank will continue to re-invest redemptions and unlike the Fed, won’t reduce its balance sheet any time soon. The ECB is set to end net asset purchases this year but the dovish leaning members around Draghi don’t seem ready to commit to a firm end date yet and are unlikely to opt for an abrupt end when the current program runs out at the end of September.
ECB pushes work on new reference rate
The ECB is pushing ahead with the search for a new reference rate and ECB’s Coeure kicked off the new working growth by stressing that Europe’s financial industry must reach a broad based consensus after current indices have been undermined by manipulation and low liquidity. The effort to find a new overnight reference interest rate by 2020 was launched last year, after the European Commission handed out fines for the manipulation of benchmarks.
BoE Deputy Governor Ramsden made hawkish
BoE Deputy Governor Ramsden made hawkish remarks in interview in yesterday’s Sunday Times, remarking that “relative to where I was, I see the case for rising interest rates sooner than later.” His comments are all more notable for the fact that Ramsden was one of two dissenters on the MPC who voted against the decision to hike the repo rate last November, to 0.50% from 0.35%, which was the first hike in over 10 years. He said he will be keeping a keep a close eye on what happens through the early part of this year to see if the BoE’s forecast for wage growth picking up to 3% is realized.
Cleveland Fed hawk Mester sees the expansion firmly in place
Cleveland Fed hawk Mester sees the expansion firmly in place along with strong labor markets and expects inflation to rise to 2% on a sustained basis over the next couple of years. She views the success of the current inflation-targeting regime as a high bar for changing the framework, which may be reassessed starting later this year. But even if the Fed maintains the status quo, she views the review as useful. This is in line with her hawkish/bullish tone recently and shouldn’t alter the markets much heading into the close. SF Fed dove Williams is due after the close on the economic outlook and monetary policy.
Powell Testimoney on Deck
The immediate focus in the U.S. is on Fed Chairman Powell’s testimony Tuesday before the House Financial Services Committee at 10 ET. The Monetary Policy Report (MPR) text Friday offered some insights, though whether the House Financial Services Committee members will ask pertinent questions is another matter. Of course Powell’s tone will be scrutinized for any nuances on the policy path, and whether he’ll be biased to the hawkish or dovish side of the spectrum, but his comments are likely to be rather balanced and stress that the policy posture is data-dependent. More insight on inflation would be helpful for Fedwatchers and the markets. The MPR stated the Fed’s understanding of the matter is “imperfect,” but the FOMC minutes indicated policymakers still see value in the Phillips curve approach. More insight on valuations will be crucial for the markets, though as seen in the MPR, the Fed seems generally sanguine over current conditions, as well as over the health of the financial sector, and its ability to absorb interest rate shocks.