EUR/USD grinds near 1.0800 as ECB, Fed policymakers defend hawkish moves, eyes on US inflation, NFP

EUR/USD licks its wound at the lowest level in 13 weeks while making rounds to 1.0800 during the early hours of Monday’s Asian session. In doing so, the Euro pair justifies the cautious optimism of the policymakers at the Federal Reserve (Fed) and the European Central Bank (ECB), per the latest speeches at the Jackson Hole Symposium. Also challenging the major currency pair’s latest moves could be the anxiety ahead of this week’s top-tier Eurozone and the US inflation clues, as well as the monthly US employment report. It’s worth noting, however, that the comparatively downbeat economic outlook for the Eurozone weighs on the quote of late.

The downbeat prints of Germany’s IFO sentiment gauges joined unchanged estimations for the nation’s second quarter (Q2) of 2023 Gross Domestic Product (GDP) to portray economic weakness in the bloc.

With this in mind, President Christine Lagarde flagged the need to set interest rates sufficiently restrictive for as long as necessary to achieve a timely return of inflation to the 2% medium-term target. ECB’s Lagarde also added that the fight against inflation "is not yet won."

On the same line, ECB Governing Council member Martins Kazaks termed the current interest rates as restrictive while also stating that prematurely stopping monetary policy tightening could present a larger problem compared to rate cuts. 

Additionally, Reuters quoted anonymous sources with knowledge of the discussion to mention that the momentum is growing for a pause in the ECB rate hikes as recession fears rise but the debate is still open.

Elsewhere, the softer prints of the US Purchasing Managers Index and Michigan Consumer Sentiment Index contrasted with mixed details of Durable Goods Orders, mid-tier activity data and inflation expectations. However, hawkish comments from Federal Reserve (Fed) Chairman Jerome Powell at the annual Jackson Hole Symposium helped the US Dollar Index (DXY) to post the fifth consecutive weekly gain while poking the three-month high.

That said, Fed’s Powell reiterated his defense for “higher for longer” rates while stating that the policy is restrictive but the Fed can’t be certain what the neutral rate level is. The policymaker also added that there is substantial further ground to cover to get back to price stability while also stating that the economic uncertainty calls for agile monetary policy-making.

Not only Fed Chair Powell but also President of the Federal Reserve Bank of Cleveland Loretta J. Mester also appeared hawkish while warning that the under-tightening would be worse than overtightening. The policymaker also added, “We are getting close to where we need to be with rates.”

Amid these plays, the US Dollar Index (DXY) managed to rise for the fifth consecutive week but the benchmark 10-year Treasury bond yields snapped the four-week uptrend by posting minor weekly losses as it retreated from the highest level since 2007.

Looking forward, the preliminary inflation data for August from the Eurozone and Germany will be crucial for the EUR/USD pair traders to watch. Also important will be the Federal Reserve’s (Fed) favorite inflation gauge, namely the Core Personal Consumption Expenditure (PCE) Price Index for July, and the monthly employment data.

Also read: EUR/USD Weekly Forecast: Central banks walking at the edge of a cliff

Technical analysis

EUR/USD bounces off an ascending support line from March 15, around 1.0770 by the press time, despite staying below the 200-DMA surrounding 1.0810 for the first time since November 2022.