- EUR/USD trades with a negative bias and is pressured by the emergence of some USD dip-buying.
- Bets for one more Fed rate hike in 2023 and elevated US bond yields continue to underpin the US.
- Geopolitical tensions further benefit the Greenback’s safe-haven status and weigh on the major.
The EUR/USD pair edges lower during the Asian session on Friday and moves away from a one-week high, around the 1.0615 region touched the previous day. The pair currently trades around the 1.0575 region, down less than 0.10% for the day, and is pressured by the emergence of some US Dollar (USD) buying, though lacks follow-through selling.
Federal Reserve (Fed) Chair Jerome Powell said on Thursday that inflation was still too high and that monetary policy was not yet too tight, reaffirming expectations for one more rate hike by the end of this year. This, in turn, keeps the yield on the benchmark 10-year US government bond elevated near a 16-year peak touched the previous day – closer to the 5% psychological mark – and continues to underpin the USD. Apart from this, the risk-off mood turns out to be another factor that benefits the safe-haven buck and weighs on the EUR/USD pair.
The market sentiment remains fragile in the wake of growing concerns that the Israel-Hamas conflict could spill over into the broader Middle East region, especially after a Gaza hospital reportedly killed hundreds of Palestinians. Adding to this, growing worries about economic headwinds stemming from rapidly rising borrowing costs further temper investors' appetite for riskier assets. This is evident from a generally weaker tone surrounding the equity markets and drive flows towards traditional safe-haven assets, including the USD.
The markets, meanwhile, have been pricing out the possibility of any further rate hikes by the European Central Bank (ECB) in the wake of fears about a deeper economic downturn and stagflation risk. In fact, the ECB signalled in September that the hike, its 10th in a 14-month-long fight against inflation, was likely to be its last. Moreover, ECB policymakers expressed cautious optimism last week that inflation was on its way back to 2% even without more rate hikes. This suggests that the path of least resistance for the EUR/USD pair is to the downside.
There isn't any relevant market-moving economic data due for release on Friday, either from the Eurozone or the US. That said, speeches by influential FOMC members, along with the US bond yields and the broader risk sentiment, will drive the USD demand and provide some impetus to the EUR/USD pair. Nevertheless, spot prices remain on track to register modest weekly gains, though any meaningful upside still seems elusive.
Technical levels to watch
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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