The US dollar extended losses yesterday after the Fed Chair expressed uncertainty about the effects of tightening on inflation. After retreating as much 0.80% during the day, EUR/USD bounced back to 1.1450 during the Asian session as investors recalibrated their expectations for a slower pace of tightening in the US, while across the Atlantic the ECB is expected to move slowly toward tightening.
This convergence of monetary policy between the two biggest central banks could lead to a sharp appreciation of the single currency and could potentially bring back the currency pair toward levels last seen three years ago. However, even though it looks like a live possibility, the ECB won’t let that happen as it would put the final nail in the coffin of already faltering inflation pressures.
All in all, Yellen didn’t bring new information to the table as all of this was already known and priced in by market participants. Therefore, investors will have to wait next week’s ECB meeting to get further clarity on EUR/USD outlook.
On Thursday, EUR/USD continued to trade below the key resistance that lies at between 1.1450-1.15 and consolidated at around 1.1440. We think it is unlikely for the euro to break the latter resistance before the ECB meeting next week. A retracement in the short-term is therefore likely.
By Arnaud Masset