Is the Fed out-hawking the ECB?

8 Feb 2023

The EUR/USD exchange rate is hovering just above $1.07, close to a nine-month high of $1.1034 reached last week. This is due to the European Central Bank's (ECB) hawkish stance, as ECB board member Isabel Schnabel has stated that the recent interest rate hikes by the ECB have had little effect on inflation. The ECB has raised interest rates by 50 basis points at its February meeting, marking the highest levels since 2008, and has indicated that there may be another increase of the same magnitude next month.

However, the strong demand for the US dollar following the unexpectedly high US employment figures released last Friday is putting pressure on the EUR. Federal Reserve Chair Jerome Powell and New York Federal Reserve President John Williams have both indicated that interest rates need to go higher and the labor market is still strong, while Fed Governor Christopher Waller warned that rates may increase more than expected.

From a technical perspective, the EUR/USD exchange rate is currently tilted towards downside risk, indicating that the market is more favorable towards the Federal Reserve hawks over the ECB hawks. The exchange rate is below all its moving averages and the 20 simple moving average has crossed below the 200 simple moving average. Additionally, momentum indicators are negative and the relative strength index is slightly declining at around 40.