Investors Brace for Fed Testimony, ECB to Hike 2% in 2023

In the absence of major economic events, the US Dollar declines as US equities climb to a new price high. Investors will now largely focus on the Federal Reserve’s Chairman’s 2-day testimony about inflation and the US monetary policy. The US Dollar has declined as we approach Mr. Powell’s speech and continues declining this morning. This morning, the US Dollar declined by 0.18%, dropping to 104.16, close to the support level formed on March 1st. 

The Euro was the currency seeing the strongest price movement over the past 24 hours. The Euro increased in value against the US Dollar, Pound, and Yen. A potential ultra-hawkish central bank has supported the Euro. The ECB’s policymaker, Mr. Holzmann, yesterday advised markets that he supports the central bank increasing interest rates by 50 basis points at the next 4 meetings. In total, that would be a further 2% in 2023. 

Other economists support the terminal rate rising to 4.5% as inflation remains stubbornly high and higher than in other regions. If a further 2% is added to the ECB’s main refinancing rate over the next 5-6 months, the price of the Euro and European indices will be strongly influenced. 

EUR/USD -  Investors Brace for the Fed’s Testimony

The EUR/USD formed a “head and shoulder” pattern yesterday, a sign of bearish price movement. However, the ultra-hawkish comments made by the European Central Bank throughout the day drove the price higher. The price has now reached the resistance level at 1.0688, formed on March 1st. Investors will deem a higher breakout of this level as a potential signal of bullish price movement. However, investors will also be cautious the resistance level is not about to cause a decline. 

EUR/USD 15-Minute Chart on March 7th 

The ECB's president has advised that inflation is likely to remain high for some time as employment remains high. The unemployment rate has stayed much lower than pre-covid figures. The EU’s Unemployment Rate has remained at 6.7% for almost a year. Before Covid-19, the region traditionally saw an Unemployment Rate between 7.5% and 10%. The President confirmed that the next meeting’s decision will most likely be “a minimum of 0.50%” and rates will continue to rise. The ECB currently has this option as they increased interest rates considerably later than other competitors. 

The Federal Reserve’s testimony and any potential hints on the bank's future prospects will be the asset's main influence throughout today's US Session. Tomorrow the exchange rate will be influenced by another speech being held by President Lagarde and the US JOLTS Job Openings. US JOLTS Job Openings are expected to decline from 11.00 million to 10.55 million.

Over the past 15 hours the asset has kept within a price range between 1.06675 and 1.06935. Investors will monitor any breakout indicating the asset’s next price movement, but investors should be cautious of corrections after breakouts. 

Crude Oil 

Crude Oil’s price has increased to $81.51 as investors believe demand has significantly risen as global economic data shows signs of economic growth. The asset's price has formed 2-week-long trends ranging consecutively between $72 and $82. The price is now close to previous levels of collapse, and traders are contemplating whether the price will again decline and at which price. 

Crude Oil Daily Chart on March 7th 

The main concern for investors is the monetary policy which continues to become more restrictive and apply pressure on the economy. The trend can quickly change if the economy starts to see a contraction or a significant slowdown. China, the largest oil importer, has set a GDP growth target of 5%, the lowest level in 30 years, and is expected to have a budget deficit of 3% this year. Economists were originally expecting a GDP target of at least 6%. Nonetheless, the price has continued to rise. Saudi Arabia has advised that demand from Europe, the Mediterranean, and China significantly increase. 

Importers from Northwest Europe will experience the cost increasing by $1 per barrel, and for the Mediterranean, by $0.30. Which, according to Bloomberg, is in response to an increase in demand. The longer-term price of the asset will largely depend if the economy can bring inflation down without any major economic decline.

Summary:

• The Euro starts the week with significant gains as economists are expecting the ECB to remain hawkish at the next 4 meetings. 
• Euro increases against the US Dollar and breaks through the head and shoulder pattern. However, investors are contemplating if the exchange rate can maintain the bullish price movement after the Fed’s speech this afternoon. 
• The EU’s Unemployment Rate has remained at 6.7% for almost a year. Before Covid-19, the region traditionally saw an Unemployment Rate between 7.5% and 10%. 
• Mr. Holzmann supports the central bank increasing interest rates by 50 basis points at the next 4 meetings.
• Crude Oil edges closer to the previous collapse level as Saudi Arabia increases prices for Europe and the Mediterranean.