Euro Cautiously Higher As Mr Powell Heads to Capitol Hill

EUR/USD News and Analysis

• EUR/USD edges up with Congressional testimony in focus
• The Fed has paused its rate hike cycle, the European Central Bank hasn’t
• EUR/USD has tracked GBP/USD up following strong UK inflation data

The Euro is trading cautiously against the United States Dollar on Wednesday, with action a little subdued across the currency complex as markets await Congressional testimony from Federal Reserve Chair Jerome Powell.

He’ll be on the stand in Capitol Hill later in the day and markets will be keen to see how hawkish he sounds when he gets there. The Fed opted to pause its long, historic series of interest rate rises this month. However, with inflation still hugely above target, if a little better behaved than it is across the Atlantic, there seems almost sure to be a resumption, perhaps very shortly.

Indeed, the market is looking at another quarter-point increase this year, while Fed guidance suggests there could be two. Investors will be looking for a steer on this later Wednesday. Powell has already pointed to the stubbornness of inflation and the ongoing tightness of the domestic labor market as reasons borrowing costs could rise further.

In Europe the case for higher rates is much clearer cut. Consumer price inflation is running at more than three times the European Central Bank’s 2% target, with prices of essentials such as food far outstripping even that.

The ECB raised its own key interest rate to 4% this month, and President Christine Lagarde has said that 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 has taken more action, but the current likely interest rate path looks quite supportive for the single currency.

Still, the fundamental picture is far less so, with Eurozone powerhouse Germany already stuck in technical recession. That country’s respected Ifo economic institute said on Wednesday that the contraction could be deeper and longer than it initially thought given inflation’s baleful impact on private sector demand.

EUR/USD may also be tracking GBP/USD higher. Sterling has seen more strong gains after official inflation data out of the United Kingdom came in strong, essentially nailing down yet another rise in interest rates.

EUR/USD Technical Analysis

Chart Compiled Using TradingView

EUR/USD bears remain stymied by the steep uptrend line which has underpinned the market since June 7.

This has its fundamental roots in the comparison between that Fed pause and an ECB determined to continue hiking.

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

Euro bulls are maintaining quite a stout defence of the psychological 1.09 support area but, should the trendline give way on a daily closing basis then the strong gains seen on June 15 will be in the spotlight, with that day’s opening low of 1.07989 likely in the spotlight ahead of the significant lows of late May.

If the pair can consolidate above 1.09, then bulls might feel emboldened to attempt early May’s high of 1.10496, itself a thirteen-month peak. They’ve got a bit of work to do before then, however, to get the pair comfortably back within the wide trading range which supported the last attempt at that peak.

For now it’s clearly bumping along the bottom of that band and may not hold up there as this week fades out. The endurance of that short-term trend line look key to direction now.

Sentiment to ward EUR/USD is perhaps understandably quite evenly split according to IG’s own trading metrics. There’s a modest bearish bias at current levels but it doesn’t look as if the market is hugely convinced.

–By David Cottle for DailyFX