Home Forex EUR/USD advances towards 1.0900 as Fed/ECB policy diverges

EUR/USD advances towards 1.0900 as Fed/ECB policy diverges

by SuperiorInvest
  • EUR/USD eyes re-test of 1.0900 amid risk-on market sentiment.
  • Investors’ risk appetite is improving again as the Fed could further reduce the pace of policy tightening.
  • The ECB appears poised to raise interest rates further by 50 bps to 3.25%.

The EUR/USD the pair is trying to extend its way to the round resistance level of 1.0900 in the Asian session. The asset has gained momentum as risk momentum regains strength. Demand for the major currency pair is escalating due to the divergent stances of the Federal Reserve (Fed) and European Central Bank (ECB) interest rate hike projections.

Meanwhile, investors willingness to take risks is improving again as S&P500 futures recover their morning losses. US dollar index (DXY) eased further to near 101.50 on rising odds of a 25 basis point (bps) rate hike by the Fed at its upcoming February meeting. U.S. 10-year Treasury yields also fell to nearly 3.51%.

Subdued retail demand, declining employment at a healthy pace, a decline in the scale of economic activity, and firms offering products at lower factory-gate prices are impacting the economic outlook in United States but they strengthen the Fed in its fight against higher inflation. This has resulted in growing expectations that the Federal Reserve (Fed) may once again reduce the scope of interest rate hikes.

Fed chairs Jerome Powell already at its December monetary policy meeting, after four consecutive rate hikes of 75 basis points, it reduced the range of interest rate hikes to 50 basis points (bps). The Fed is expected to raise interest rates by 25 bps ahead.

On eurozone front, ECB President Christine Lagarde and his teammates favor continued higher interest rates to significantly ease inflationary pressures.

ECB policymaker Peter Kažimír said on Monday that easing inflation was good news, but added that it was not a reason to slow the pace of interest rate increases, as reported by Reuters. He further added: “I believe we need to make two more 50 basis point (bps) hikes.

The latest Reuters poll of economists says the European Central Bank (ECB) raised rates by another 50 basis points at its February policy meeting, with the key rate expected to reach 3.25% by mid-year.

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