EUR/USD falls above 1.0400 on calm market mood, Eurozone gas price structure in plain sight

  • The EUR/USD pair moved sideways above 1.0400 on less trading activity during Thanksgiving Day.
  • The Federal Reserve is ready to abandon the 75 basis point rate hike measure to safeguard the economy from financial risks.
  • The European Central Bank is set to tighten policy further to ease inflationary pressures.
  • The EUR/USD pair is likely to remain in the grip of the bulls as the risk appetite theme has not yet faded away.

The EUR/USD pair is showing a lackluster performance in the Tokyo session after re-emerging from the critical support at 1.0382. The Euro pair is swinging above the round support level of 1.0400. Major is waiting for a potential trigger for fresh momentum as the market mood is extremely quiet over the US holiday due to Thanksgiving.

The USD Index (DXY) is signaling a rangebound structure after finding a cushion around 105.64. The absence of pure trading activity has moved currencies to the sidelines, however, risk appetite is still bullish. S&P500 futures posted some gains on Thursday despite the close in US markets. The hangover of less hawkish comments from Federal Reserve (Fed) policymakers should stick around for a while. As the Federal Reserve leans heavily towards the alternative of slowing the pace of interest rate hikes, the US dollar will remain on its toes.

Meanwhile, the euro is expected to enjoy further gains as European Central Bank (ECB) policy makers are seeing more policy tightening due to the absence of a spike in Eurozone inflation.

The Federal Reserve is ready to abandon the culture of raising rates by 75 bps

The US consumer price index (CPI) already showed signs of slowing in its October inflation report. This provided Federal Reserve Chairman Jerome Powell an opportunity to slow the pace of rate hikes and shift his focus to rising financial risks. The structure of major consecutive rate hikes by the Federal Reserve (Fed) has exposed companies to skipping their monthly obligations due to higher interest payments. Furthermore, a slower pace of interest rate hikes by the Federal Reserve would provide an opportunity to look at the results of its efforts to cool inflation so far.

After Federal Reserve policymakers signaled that a slower pace of interest rate hikes would be optimal, the US dollar is having a bumpy ride. The US dollar is expected to fall further to a nearly three-month low of around 105.34. Contrary to the efficient market hypothesis, economists at ANZ Bank considered the move exaggerated as headline inflation at 7.7% is still a long way from the 2% target rate.

Further tightening of policy by the European Central Bank in support of the euro

Persistent supply chain risks in the Eurozone after the Russian invasion of Ukraine accelerated inflation and deep recession risks. Eurozone inflation has reached 10.7% and to bring it down, ECB Governing Council member Isabel Schnabel said on Thursday it would likely need to raise interest rates further into restrictive territory, as reported by Reuters. The European Central Bank’s policy officer also added that the room to slow down the pace of interest rate adjustments remains limited. And the greatest risk for central banks remains a policy falsely calibrated on the assumption of a rapid fall in inflation.

Meanwhile, minutes from the European Central Bank’s (ECB) October policy meeting revealed on Thursday indicated that some members also voted for an interest rate hike by 50 basis points (bp). The Governing Council of the European Central Bank believes that policy tightening could be halted if there are signs of a deep and prolonged recession.

A price cap structure on gas in the Eurozone is expected

European Union (EU) authorities are planning to cap energy prices to safeguard households from a sharp drop in their real income. In response to this, the Intercontinental Exchange (ICE) warned that finalizing the European gas cap would force energy traders to fork out an additional $33 billion in margin payments, the Financial Times reported. Such a large increase in margin requirements could “destabilize the market”,

EUR/USD technical outlook

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 hitting a high of 1.0482 on November 15th near 1.0226 was supported by the ascending trendline positioned from the November low at 0.9730. Going forward, potential resistances are drawn from the June 27 high at 1.0615 and the May 30 high at 1.0787.

The Relative Strength Index (RSI) (14) is hovering in a bullish range of 60.00-80.00, which indicates that bullish momentum is active.

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