Oct 20, 2023

The EURUSD got a boost from Fed Chair Jerome Powell’s comments on the bond market.

eurusd chart

EURUSD: Daily Chart

The EUR/USD exchange rate rallied to 1.06 on the day after testing the March support of 1.054 the previous day. The euro needs to get past 1.065 for a sustained rally.

Chair Powell suggested that he is pleased with a drop in inflation this summer and that the central bank is unlikely to raise interest rates again unless it sees clear evidence that stronger economic activity is a threat.

“Given the uncertainties and risks and how far we have come, the committee is proceeding carefully,” Powell said. “Incoming data over recent months show ongoing progress towards both” of the Fed’s goals of stable prices and strong employment.

Powell’s remarks also echoed those of his Fed colleagues in recent days who have suggested they are prepared to hold short-term interest rates steady at their next meeting, which ends Nov. 1. Fed policymakers have said that the run-up in bond prices has been doing the job of the Fed recently.

“We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy,” Powell said.

Decisions over whether to raise rates again would depend “on the totality of the incoming data, the evolving outlook, and the balance of risks,” he added.

Despite his comments, the US 10-year yield hit 2023 highs and is still at its highest since 2007. “The markets have largely priced in that the Fed will stay on hold for rates at their next meeting and will be looking at Powell’s speech for clues that this is right,” said Nigel Green of London’s deVere Group.

“But we expect that recent events in the Middle East and their effects on oil markets will make Chair Powell more cautious than many had been expecting,” he added.

Markets are pricing that the Fed will hold rates steady in November, with the odds of a December hike now around 35%. However, the odds shift to a 50% chance of a hike in January.

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