EUR/USD turns dry above 1.0400 amid quiet market mood, Eurozone Gas price structure eyed

  • EUR/USD turned sideways above 1.0400 due to less trading activity amid Thanksgiving.
  • The Federal Reserve is set to drop a 75 basis point rate hike to protect the economy from financial risks.
  • The European Central Bank is required to tighten policy further to slow inflationary pressures.
  • EUR/USD is likely to remain in the grip of the bulls as the issue of risk appetite has not faded away yet.

The EUR/USD pair showed a poor performance in the Tokyo session after resurfacing from the critical support level at 1.0382. The euro is hovering above the support level of 1.0400. The major is waiting for a possible catalyst for a new impulse as the market mood is very calm amid the holiday in the US due to Thanksgiving.

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US Dollar Index (DXY) is pointing to a range bound structure after finding a cushion around 105.64. The absence of sheer trading activity has shifted currencies to the sidelines, however, the risk driver remains bullish. S&P500 futures posted some gains on Thursday even though the US markets were closed. The hangover from less hawkish comments from Fed policymakers is expected to linger for some time. With the Federal Reserve leaning heavily towards the alternative of slowing the pace of interest rate hikes, the US dollar will remain very alert.

Meanwhile, the euro is expected to enjoy additional gains as policymakers at the European Central Bank (ECB) see more policy constraints due to the lack of a peak in inflation in the eurozone.

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The Federal Reserve is set to abandon the culture of raising interest rates by 75 basis points

The US Consumer Price Index (CPI) has already shown signs of slowing down in the October inflation report. This provided an opportunity for Federal Reserve Chairman Jerome Powell to slow the pace of rate hikes and shift his focus toward expanding financial risks. The structure of large interest rate hikes by the Federal Reserve (Fed) has left companies vulnerable to missing out on their monthly obligations due to higher interest payments. A slowdown in the pace of interest rate hikes by the Federal Reserve should provide an opportunity to monitor the achievements led by the efforts made so far to cool inflation.

After Fed policy makers signaled that a decrease in the pace of rate hikes would be optimal, the US dollar is going through a bumpy ride. The US dollar is expected to drop further to approach a three-month low of 105.34. Contrary to the efficient market hypothesis, economists at ANZ Bank considered this move to be excessive because the headline inflation of 7.7% was still far from the target rate of 2%.

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Further policy tightening by the European Central Bank to support the euro

Persistent supply chain risks in the eurozone after Russia’s invasion of Ukraine have accelerated inflation and risks a deep recession. European Central Bank Governing Council member Isabel Schnabel said Thursday that inflation in the eurozone has reached 10.7% and for the same reduction, they probably need to raise interest rates further in the restricted area, as reported by Reuters. The ECB policymaker added that there was still limited scope for slowing the pace of interest rate adjustments. The biggest risk for central banks remains policy miscalibrated on the assumption of a rapid drop in inflation.

Meanwhile, accounts for the European Central Bank’s October meeting on Thursday revealed that a few members also voted to raise interest rates by 50 basis points. The ECB’s Governing Council believes that policy tightening could be paused if there are signs of a deep and prolonged recession.

Pending structure for the eurozone gas price

The EU authorities plan to put a cap on energy prices to protect households from a massive drop in their real income. In response, the Intercontinental Exchange (ICE) warned that finalizing a European gas cap would force energy traders to pay an additional $33 billion in margin payments, the Financial Times reported. Such a large increase in margin requirements could “destabilize the market”,

Technical outlook for the EUR/USD pair

EUR/USD is playing with the 200-period exponential moving average (EMA) at 1.0389 on a daily scale. The asset’s corrective move after recording a high of 1.0482 on Nov 15th near 1.0226 was supported by an upward sloping trend line set from the November low of 0.9730. Going forward, potential resistance is drawn from 1.0615 June 27 high and 1.0787 May 30 high.

The RSI (14) is swinging in an upward range from 60.00-80.00, indicating that the upside momentum is active.

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