Euro to USD Rises as ECB Hawks Call for More Rate Hikes and Investors Await Fed Meeting Outcome

Key Takeaways

• Bundesbank Chief Joachim Nagel urges persistent borrowing cost increases to combat inflation as German 2-year government bond yield rises to 2.68%.
• Despite European banking crisis concerns, markets continue to reprice future rate rises with Germany’s 10-year government bond yield rising to 2.33%.
• ECB’s interest rate hikes are beginning to impact the economy, says ECB President Christine Lagarde.
• The US Federal Open Market Committee (FOMC) is expected to announce a 25 bps rate hike with a cautious approach from Chair Jerome Powell.
• Market stress indicators have reverted to pre-banking crisis levels, signaling a return to risk appetite with Italy’s 10-year government bond yield at 4.16%, while the US Treasury Secretary pledges to protect depositors in smaller banks facing deposit runs.

Overview

The Euro is trading higher against the U.S. Dollar on Wednesday as Euro zone government bond yields rose as investors awaited the outcome of the Federal Reserve policy meeting, with fears of a banking crisis fading and European Central Bank (ECB) hawks calling for more rate hikes.

At 10:44 GMT, the EUR/USD is trading 1.0787, up 0.0017 or +0.16%. On Tuesday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $99.39, up $0.40 or +0.40%.

Bundesbank Chief Urges Persistence in Increasing Borrowing Costs to Combat Inflation

Bundesbank Chief Joachim Nagel calls for persistent borrowing cost increases to fight inflation as Germany’s 2-year government bond yield rises to 2.68%. Despite European banking crisis concerns, markets continue to reprice future rate rises. Germany’s benchmark 10-year government bond yield rose to 2.33%. ECB’s interest rate hikes are beginning to impact the economy, says ECB President Christine Lagarde.

US Federal Reserve Likely to Raise Interest Rates by 25 bps, with a Cautious Approach Expected

Firstly, the US Federal Open Market Committee (FOMC) is expected to announce a 25 bps rate hike. However, the Chair Jerome Powell is expected to approach it cautiously.

Additionally, analysts anticipate that the post-meeting statement will omit hawkish remarks, with a possibility of Fed rate hikes and balance sheet reduction ending earlier, subject to financial stability.

Stress Indicators Return to Pre-Crisis Levels, Indicating a Rebound in Risk Appetite

Market stress indicators have reverted to pre-banking crisis levels, signaling a return to risk appetite. The gap between two-year euro swap rates and two-year German bond yields has reduced to 68 bps. Italy’s 10-year government bond yield rose to 4.16%, while the US Treasury Secretary has promised to protect depositors in smaller banks facing deposit runs.

Daily EUR/USD Technical Analysis

The main trend is up according to the daily swing chart. A trade through 1.0517 will change the main trend to down. The nearest upside target is the main top at 1.1033.

The main range is 1.1033 to 1.0517. The EUR/USD is currently trading on the strong side of its 50% level at 1.0775, making it support. After overcoming a minor top at 1.0804, the next target will be a long-term 50% level at 1.0943.

Daily EUR/USD Technical Forecast

Trader reaction to 1.0775 is likely to determine the direction of the EUR/USD on Wednesday.

Bullish Scenario

A sustained move over 1.0775 will indicate the presence of buyers. Taking out the minor top at 1.0804 could trigger an acceleration to the upside with 1.0943 the first near-term target.

Bearish Scenario

A sustained move under 1.0775 will signal the presence of sellers. A trade through this level with strong selling volume could extend the move into 1.0661.