EUR/USD falls back to mid-1.10s amid euro profit-taking following strong week & hawkish Fed commentary

• After a strong week, the euro is suffering from some profit-taking and EUR/USD has fallen back to the mid-1.10s.
• EUR/USD’s failure to press higher beyond the 1.1100 level was likely also due to hawkish Fed commentary.

Though not the worst-performing currency in the G10 on the day, the euro currently sits near the bottom of the relative performance table having dropped about 0.3% versus the US dollar amid profit-taking at the end of what has otherwise been a good week for the single currency. Indeed, while it was unable to hold above its 21-Day Moving Average (currently at 1.1093) for a second successive day, EUR/USD looks to end the week about 1.4% higher just to the north of 1.1050, having rallied from the low 1.0900s. That marks a first weekly gain for the pair in seven.

EUR/USD’s failure to press higher beyond the 1.1100 level likely has something to do with very hawkish commentary from the likes of Fed’s Christopher Waller and James Bullard, who both threw their support behind a faster pace of interest rate hikes (i.e. in 50bps intervals) this year. Both want to see rates moving above so-called “neutral” by the end of the year given high inflation and the tight labour market. Their commentary saw traders upping bets on a 50bps rate hike at the Fed’s next meeting and comes after the Fed announced earlier in the week that it is likely to lift interest rates at every remaining policy decision this year (in 25bps intervals), followed by a further four hikes in 2023.

Of course, the ECB has also been tilting in a more hawkish direction in recent weeks, as emphasised in last week’s policy meeting where the bank laid out plans to completely end its QE programme by the end of Summer to pave the way for a rate hike in Q4. This, alongside optimism/speculation about progress towards a Russo-Ukrainian peace deal, has likely been supporting the euro this week. Whether this can continue next week is the big question – if there were to be more positive news flow on Russo-Ukraine talks, a continued push higher would seem likely.

From a technical perspective, EUR/USD continues to find support at an uptrend from the earlier monthly lows and if the pair can push above resistance in the 1.1100-1.1130 zone, that could open the door to a run back towards pre-Russia invasion levels at 1.1300. But that’s a big if and markets are very likely to remain highly choppy/headline-driven for the foreseeable future.