EUR/USD consolidates around the 1.2150 mark, unmoved by Fedspeak and Beige Book

EUR/USD rallied as high as the 1.2220s during the early part of Wednesday’s European session, but since the pair hit its 21-day moving average at 1.2222, it has been broadly on the back foot, despite much stronger than expected Eurozone Industrial Production numbers for November that were released during the European morning. At present, the pair is trading close to 1.2150, down about 50 pips or 0.4% on the day. 

A broad recovery in the US dollar (the Dollar Index was supported at 90.00 and has recovered back to the 90.30s) is one factor behind the recent downside, though EUR is underperforming most of its G10 peers in wake of seemingly dovish ECB speak; ECB President Christine Lagarde and another ECB member both said on Wednesday morning that the bank was now going to be extremely attentive to the exchange rate, an upgrade in the language that they have in the past used to attempt to jawbone EUR lower against its major peers.

Note, however, that if the ECB isn’t willing to either significantly expand their QE operations or make further cuts to interest rates, which it doesn’t seem as though they are, there is little the bank can do to prevent further USD weakness fuelled EUR/USD appreciation. Perhaps their best hope is if the recent recovery in USD (that has seen DXY recover back above 90.00 from recent lows in the 89.20s) continues on its own accord, perhaps if US bond yields continue to rise.

EUR/USD saw momentary weakness when the leader of the Italia Viva Party announced that he would be pulling his ministers from the ruling coalition's cabinet over disagreements about how to spend the incoming EU Recovery Fund money. The ruling coalition has now lost it's majority in parliament and, while an election is still seen as unlikely, its possibility is rising, which could weigh on EUR via a widening in the EUR/USD cross.   

Elsewhere, a barrage of Fedspeak, as well as the release of the Fed’s latest Beige Book, did little to inspire price action or indeed fresh direction for the US dollar. Focus is on incoming US President Joe Biden’s stimulus plan announcement (reports citing leaked details of the plan suggest it will include generous child benefits) and a speech from Fed Chair Jerome Powell.

Fed Update

A number of FOMC members have been on the wires over the last few hours;

FOMC member Lael Brainard re-emphasised that the Fed’s new monetary policy framework approach avoids the need to tighten policy pre-emptively, something which could boost employment and the economy’s potential growth rate. Brainard said that the economy remains far away from the Fed’s goals and that while inflation might rise temporarily above 2% in the coming months, a sustained move above 2% would be needed in order to meet the Fed’s inflation goal. On the current hot Fed topic of if and when it might taper its asset purchase programme, Brainard said that she expects the current pace of asset purchases to remain appropriate for quite some time and reiterated that the Fed stands ready to increase the pace of purchases if needed.

Meanwhile, St. Louis Federal Reserve President James Bullard had some interesting comments; whilst he acknowledged that money supply has "exploded," fiscal deficits are "off the charts" and a hot economy may either already be here or "just around the corner”, he reiterated that they won't pre-emptively react to a rise in inflation by tightening policy as it needs to regain credibility on its inflation target.

Philadelphia Fed President Patrick Harker and FOMC Vice Chairman Richard Clarida also spoke, but both stuck to the usual Fed script and added nothing new.

Fed’s Beige Book

Elsewhere, the Fed’s latest Beige Book was released, containing insight from Fed industry contacts and what they saw in the US economy in the period leading up to 4 January (when the survey stopped collecting data).

In terms of the labour market; a majority of districts reported that employment had risen, although the pace of recovery was slow, and the recovery remained incomplete. Labour demand was strongest in the manufacturing, construction, and transportation sectors. Some employers noted staffing shortages and difficulty attracting qualified workers, especially for entry-level and on-site positions. These hiring difficulties were exacerbated by the recent resurgence in Covid-19 cases and resulting in workplace disruptions in some districts. Contacts in the leisure and hospitality sectors reported renewed employment cuts due to stricter containment measures.

In terms of wages; firms in most districts reported that wages increased modestly but generally remained weak. Employers in some districts reported raising wages or offering more generous benefits, such as year-end bonuses and flexible work arrangements, to limit employee turnover.

In terms of economic activity; most districts said that economic activity had increased modestly since the previous beige book period, but conditions remained varied. However, two districts reported little or no change in activity and another two others noted a decline. Manufacturing activity, meanwhile, continued to recover in almost all districts. Reports on consumer spending from fed districts were mixed. Meanwhile, residential real estate activity remained strong but weak conditions in commercial real estate persisted. Banking contacts saw little or no change in loan volumes. Finally, the prospect of vaccines bolstered business optimism for 2021 growth, though this was somewhat tempered by concern over the recent resurgence of the virus.

In terms of inflation; almost all districts saw modest price increases since the last report. Prices for construction and building materials, steel products, and shipping services were reported to have risen further. Contacts in several districts noted an improved ability to raise final selling prices to consumers and some contacts cited plans to increase selling prices in coming months. Meanwhile, energy prices picked up but remained below pre-pandemic levels and home prices continued to climb, driven by low inventories and rising construction costs. Finally, the growth in input prices continued to outpace finished goods and services.

EUR/USD key levels