EUR/USD: Steady as Investors Consider Hawkish Lagarde ahead of Powell’s Speech

Highlights:

• EUR/USD slightly lower after Lagarde’s comments and Fed uncertainty.
• Powell hints at further rate hikes to stimulate the U.S. economy.
• ECB’s Lane warns against eurozone rate cuts, emphasizes stability.

Overview:

The EUR/USD is slightly lower on Wednesday, following an overnight increase of 0.5% driven by hawkish comments from ECB President Lagarde. While Lagarde’s remarks supported prices, uncertainty surrounding Federal Reserve policy limited gains. Investors were awaiting fresh comments from Federal Reserve Chairman Jerome Powell, who will speak at the European Central Bank Forum on Central Banking in Sintra, Portugal.

Powell Signals More Rate Hikes

Powell has indicated the likelihood of further interest rate hikes in the U.S., as the central bank aims to stimulate the economy and address inflation concerns. Economic data reflecting resilience in the economy has led markets to price in another rate hike during the July Fed meeting. Looking ahead, investors are keeping an eye on Friday’s personal consumption expenditure price index report, which is the Fed’s preferred measure of inflation.

ECB’s Lane Warns Against Rate Cuts

Meanwhile, ECB Chief Economist Philip Lane cautioned against anticipating interest rate cuts in the eurozone within the next two years. The ECB recently raised its main rate by 25 basis points to 3.5% in response to high inflation. Headline inflation in the eurozone stood at 6.1% annually in May, slightly lower than the previous month’s 7%, while core inflation remained at 5.3%, well above the ECB’s 2% target.

Eurozone Economy Faces Adjustment Phase

Lane emphasized that the eurozone economy is in an “adjustment phase” as higher rates begin to influence wages and align with rising prices. He highlighted the importance of considering the timing. As well as the pace of policy reversals, noting that achieving a 2% inflation level would require time. ECB President Christine Lagarde echoed these sentiments. She stated that although progress has been made, the central bank cannot declare victory yet.

ECB and Fed Slightly Diverge in Policies

As the ECB pursues its restrictive stance, the U.S. Federal Reserve recently paused its rate-hiking cycle, maintaining its target rate unchanged. Lane suggested that policymakers should maintain a restrictive policy for a sustained period. He feels this would ensure stability and protect against potential shocks.

Technical Analysis:

The EUR/USD is exhibiting slightly bullish sentiment. The current 4-hour price at 1.0956 is slightly higher than the previous close of 1.0953. The price remains above the 200-4H moving average at 1.0814 and the 50-4H moving average at 1.0933, indicating a positive bias. The 14-4H RSI reading of 58.08 suggests a neutral market condition.

The proximity of the current price to the main resistance area of 1.1006 to 1.1074 implies potential resistance ahead. The chart also indicates there is plenty of room to the downside if the 50-4H at 1.0933 fails as support. Traders should monitor price action for confirmation and observe any developments around the resistance levels.