EUR/USD stabilizes as Fed’s hawkish comments boost dollar

Introduction

The EUR/USD pair faced a significant sell-off on Tuesday, following Federal Reserve Chairman Jerome Powell’s testimony before the U.S. Senate. The hawkish tone of his comments triggered a dollar rally, with expectations rising that the Fed might hike by 50 bps at the March meetings. In this article, we will discuss the impact of Powell’s testimony on the currency pair and the market, as well as expectations for the upcoming nonfarm payrolls report.

The EUR/USD Pair Stabilizes

Despite hitting a two-month low of 1.0524, the EUR/USD pair managed to stabilize and recover a few pips after finding support at the 100-day Simple Moving Average (SMA). At the time of writing, the pair is trading at the 1.0545 area, almost unchanged since opening. Powell’s comments had a significant impact on the currency pair, as traders reacted to the possibility of more aggressive rate hikes by the Fed.

Powell’s Testimony

In his testimony before the U.S. Senate, Powell stated that the Federal Open Market Committee (FOMC) is willing to accelerate the pace of rate increases, given that macroeconomic figures have been better than expected. However, he also noted that inflation remains far above the Fed’s target of 2%. Powell will speak before the House of Representatives later in the session, and his comments will be closely watched by traders for any further clues on the Fed’s policy stance.

Market Reaction

Powell’s hawkish comments triggered a dollar rally and boosted short-term Treasury yields, with the United States 2-Year rate reaching a 15-year peak at 5.085% on Wednesday. The market is now pricing in a higher probability of a 50 bps rate hike at the March meetings, which could further strengthen the dollar and weigh on the EUR/USD pair.

Nonfarm Payrolls Report

The upcoming nonfarm payrolls report, due on Friday, is expected to show strong job gains in February, with the ADP data already indicating that the U.S. private sector added 242,000 new jobs, surpassing expectations of a 200,000 increase. The strong job gains further fuel expectations that the central bank will act more aggressively this time, which could further impact the currency pair.

Conclusion

The EUR/USD pair stabilized after the sharp sell-off triggered by Powell’s hawkish comments, finding support at the 100-day Simple Moving Average (SMA). The market is now pricing in a higher probability of a 50 bps rate hike at the March meetings, which could further strengthen the dollar and weigh on the currency pair. Traders will be closely watching Powell’s testimony before the House of Representatives for any further clues on the Fed’s policy stance, as well as the upcoming nonfarm payrolls report for insights into the health of the U.S. labor market.