EUR/USD holds firm on Wednesday after briefly slipping to a three-month low on Tuesday. The pair stabilises as the US Dollar (USD) takes a breather following a two-day rally, with the Euro (EUR) drawing modest support from upbeat Eurozone economic data.
At the time of writing, EUR/USD is trading around 1.1626, though it lacks follow-through buying as market sentiment remains fragile amid the ongoing US-Iran conflict.
On the data front, US private sector employment rose by 63K in February, beating expectations of 50K and accelerating from the 11K increase recorded in January, according to the latest ADP Employment Change report.
However, the data offered little support to the Greenback. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 98.91 after climbing to its highest level since November 28, near 99.68 on Tuesday.
In the Eurozone, the Producer Price Index (PPI) rose 0.7% MoM in January, rebounding from -0.3% in December and beating expectations of 0.2%. On a yearly basis, PPI fell 2.1%, easing slightly from the -2.0% decline recorded previously, though the drop was smaller than the -2.7% forecast.
The Eurozone Unemployment Rate fell to 6.1% in January from 6.2% in December.
Meanwhile, traders remain focused on escalating tensions in the Middle East. The ongoing US-Iran conflict is embedding a geopolitical risk premium in energy markets and raising concerns about higher global inflation, prompting investors to reassess the monetary policy outlook for major central banks.
Money markets are pricing in around a 40% probability of an European Central Bank (ECB) rate hike by year-end. However, ECB policymaker Martins Kazaks said the central bank should “sit tight” and keep interest rates steady for now, noting that the economic impact of the war in Iran remains uncertain, Reuters reported on Tuesday.
At the same time, traders have trimmed near-term Federal Reserve (FED) rate-cut bets. According to the CME FedWatch Tool, markets are fully pricing in a rate hold at the March and April meetings, while the probability of a 25-basis-point cut in June stands at around 36.4%.
Fed Governor Stephen Miran reiterated his dovish stance, saying that around one percentage point of rate cuts would be appropriate this year. Miran also noted that it would be appropriate to continue cutting rates at the March meeting, adding that his outlook has not changed despite the outbreak of the conflict in Iran.
Attention now turns to the US ISM Services Purchasing Managers’ Index (PMI) due later on Wednesday and the Nonfarm Payrolls (NFP) report on Friday.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Source: https://www.fxstreet.com/news/eur-usd-stabilises-after-touching-three-month-low-as-usd-rally-stalls-202603041444
