EUR/USD extend gains on Hawkish ECB and weak USD

  • The EUR/USD pair has successfully climbed higher after closing the previous week on a strong note.
  • European Central Bank chief economist believes that further rate rises will be required after March.
  • Fed Chair Powell’s semi-annual testimony is key for the short-term outlook.

EURUSD Fundamental Analysis

EUR/USD is trading at $1.0642, up by 0.09% in 24 hours. The currency pair bounced from a two-month low because of the broad US Dollar decline and hawkish speculations about the European Central Bank (ECB).

Hawkish ECB is helping EUR/USD

Last week, the CPI and the Harmonized Index of Consumer Prices (HICP) in Europe reported positive values for February. The higher-than-anticipated consumer inflation statistics for February raised hopes that the ECB could increase interest rates to record levels.

Moreover, according to today’s figures, inflationary pressures are still having a negative impact on retail sales. Eurozone retail sales fell by 2.3% YoY in January 2023 and weighed on EUR, however, it was not enough to reverse EUR/USD price. The MoM report showed a 0.3% gain, falling short of market estimates of a 1.0% rise.

Continuous Eurozone inflation and growing market expectations for interest rates caused the European Central Bank’s chief economist to make hawkish remarks, which shook sentiment.

Today, ECB’s Chief economist Philip Lane said for the first time that interest rates would rise again in May, in addition to the widely anticipated boost next week. He spoke on measuring underlying inflation in the euro area during a speech to faculty and students at Trinity College Dublin.

Market players now believe that ECB interest rates will reach 4% later this year. The ECB has previously stated that it would rate interest rates by 0.5% at its upcoming ECB Governing Council meeting, scheduled for March 16.

The Euro continues to gain from hawkish central bank statements and helps EUR/USD to rise in the market.

Meanwhile, traders are waiting for more information regarding the forex pair direction in Tuesday’s ECB Consumer Expectations Survey data and Christine Lagarde’s speech on Wednesday.

Rising concerns of Fed interest rates helped EUR/USD

On the USD front, uncertainty surrounds the Federal Reserve’s (Fed) hawkish sentiments due to US statistics from the prior week. Therefore, on Friday of last week, the US Federal Reserve made it very apparent in its semi-annual Monetary Policy Report that the Fed is committed to returning inflation to 2%. The report also stated that the Fed funds rate target must continue to rise.

The US economy continues to attract positive investor sentiments despite robust service sector activities, high inflation, and a tight labour market. However, problems in the factory sector are still a concern. Therefore, DXY is trading down at 104.50.

Looking ahead to today’s US session, traders are awaiting factory orders for January. A higher-than-expected drop in factory orders would support the Fed’s slow and steady attitude about hikes in interest rates.

Furthermore, market participants will monitor Fed chatter before Fed Chair Powell’s speech on Tuesday. A hawkish outlook would put the EUR/USD support to the test.

The greatest discovery of my generation is that a human being can alter his life by altering his attitudes.

William James