Euro’s recent gains vulnerable to looming Fed chair remarks

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The foreign exchange markets were prepared for comments from the Federal Reserve’s chair, Jerome Powell, on Thursday. They were eager to find out if Powell would respond to the recent surge in U.S. Treasuries, which has played a role in boosting the value of the euro and pound.

The euro has slightly decreased by 0.1% and is currently valued at $1.06985. However, it remains close to its recent high of $1.0765 which was reached on Monday. Additionally, the euro is performing strongly against the yen, standing at 161.6 yen, marking a 15-year high.

Sterling was up a touch at $1.2291.

The main event of the day is yet to happen, as Powell is scheduled to deliver a speech at 1900 GMT.

Simon Harvey, head of FX analysis at Monex Europe, mentioned that the main focus currently is Powell, Powell, Powell. He highlighted that the two-year yields are now under 5%, while the 10-year yields are around 4.5%. Harvey wondered what the reaction would be to this situation.

Can we expect the U.S. Treasury curve to decline further, or is this the lowest point it will reach? The markets will continue to challenge this until we see a strong reaction.

The current 10-year U.S. Treasury yield is 4.531%, which has decreased from its highest point of above 5% in mid-October. Bonds have been supported by various factors such as the U.S. Treasury projecting lower borrowing for the fourth quarter and disappointing U.S. job data, which has solidified the belief that the Fed will not increase interest rates.

Harvey stated that the situation will affect currencies that have experienced significant pressure from yields, particularly the euro/dollar. According to him, the European economy’s fundamentals do not justify the current levels of euro dollar trading. Therefore, if Powell opposes tonight, the greatest repercussions will be felt in this particular currency pair.

On Thursday, the yen was once again facing difficulties as the dollar climbed to a value of more than 151 yen. This brought the dollar closer to the 151.73 yen mark it had reached the previous week, following the Bank of Japan’s adjustment of its easy monetary policy which was not as significant as anticipated by traders.

This led to heightened concerns that Japanese officials would intervene in currency markets to protect their currency. As a result, investors perceive selling yen against the euro as a safer option than risking potential intervention when trading the dollar/yen pair.

In a statement, Kazuo Ueda, the Governor of the Bank of Japan, expressed that the BOJ plans to maintain its approach of yield curve control and negative rates until it becomes imperative for achieving a consistent 2% inflation rate.

In other areas, the decrease in oil prices provided a positive impact on the euro and pound, but hindered currencies that are connected to commodities.

The Australian dollar reached a low point for the week of $0.6396, and the Canadian dollar was also facing challenges at C$1.3792 per dollar. Additionally, the crown of Norway briefly weakened beyond 12 euros overnight, marking its lowest point since May.

MUFG analysts stated in a note that the Canadian dollar and the Norwegian crown have both been weakened due to the significant decrease in the price of oil.

The Chinese yuan decreased in expectation of additional interest rate reductions following the release of data indicating a decline in Chinese consumer prices for the month of October.

Michael Wan, a currency analyst at MUFG in Singapore, stated that due to low inflation levels and a slow economic recovery, there is a strong belief in the market that the Chinese central bank will implement more rate cuts in the future.