EUR/USD Forecast: Euro drifts lower with Warsh emerging as the next Fed Chair
- EUR/USD retreats to levels near 1.1900 amid a moderate US Dollar recovery.
- Investors welcome news pointing to Kevin Warsh as the next Fed Chairman.
- Hopes that the US Government shutdown can be avoided have provided additional support to the USD.
The Euro posts moderate losses on Friday, trading at 1.1920 at the time of writing, as the US Dollar picks up amid speculation that Warsh will be the next Federal Reserve (Fed) Chairman and hopes that the government shutdown can be avoided.
US President Donald Trump said on Thursday that he will announce the name of Jerome Powell's replacement at the Fed, and media outlets are pointing to former Fed governor Kevin Warsh as the best positioned for the job. Investors have shown some relief in the conviction that Warsh will be able to guarantee the central bank’s independence rather than acting on Trump’s orders.
Beyond that, news that US Senate Democrats and Republicans have reached an agreement on a package of spending bills has boosted hopes that another government shutdown can be averted, providing additional support for the Greenback.
US data released on Thursday was mixed. Factory Orders bounced up beyond forecasts, but Initial Jobless Claims were also higher than expected, and the trade deficit widened. On Friday, the focus will be on the Q4 Eurozone Gross Domestic Product (GDP) and the German Harmonised Index of Consumer Prices (HICP). In the US session, December's Producer Prices Index (PPI) will attract attention.
Technical Analysis
EUR/USD trades at 1.1925, with support at 1.1895 in the spotlight. Technical indicators are pointing to a growing bearish momentum. The Moving Average Convergence Divergence (MACD) histogram has slipped below zero and shows expanding red bars, and the Relative Strength Index (RSI) is attempting to break the key 50 level.
A confirmation below the mentioned 1.1895 area (January 28, 29 lows) would bring the January 27 low, at 1.1850, to the focus, ahead of the January 23 low near 1.1730. To the upside, resistances are at the January 29 high, near the 1.2000 psychological level, and the January 27 high, at 1.2082.
(The technical analysis of this story was written with the help of an AI tool.)
(This story was corrected on January 30 at 08:02 GMT to include the Eurozone GDP among the macroeconomic events scheduled for Friday.)
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Premium
You have reached your limit of 3 free articles for this month.
Start your subscription and get access to all our original articles.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
