EUR/USD holds to minimal gains above 0.9700, on risk aversion, after BoE's Bailey comments

• EUR/USD is barely up 0.08% on Tuesday, following BoE’s Baily remarks, which deteriorated traders’ mood.
• US Fed officials continued expressing that inflation is high and that further rate hikes are needed.
• The ECB Chief Economist Philip Lane commented that hiking rates’ impact is harder than unwinding the balance sheet.

The EUR/USD pares earlier gains, courtesy of a risk-off impulse spurred by the Bank of England’s Governor Andrew Bailey, which sent the GBP/USD tumbles below 1.1000, while the EUR/USD followed suit, approaching the 0.9700 figure.

At the time of writing, the EUR/USD is trading at 0.9704 after hitting a daily high nearby the 0.9770s mark, threatening to print a daily close below October’s 10 low of 0.9681.

Sentiment fluctuates, as US equities show, finishing Tuesday’s session mixed. BoE’s Governor Andrew Bailey spooked investors when he said that UK’s pension funds have just 3-days to rebalance, saying that the bond emergent program was part of the BoE’s financial stability operations, not a monetary policy tool. Earlier, the BoE stepped in, buying inflation-linked government bonds.

Therefore, the EUR/USD slid from around 0.9774 day’s high toward 0.9693 before reclaiming 0.9700.

Aside from this, in the last couple of days, Fed officials reiterated that they’re committed to bringing inflation down. Cleveland’s Fed Loretta Mester said on Tuesday that the Fed needs to continue to raise rates until they see compelling evidence that inflation is cooling, while Chicago’s Fed Evans commented that he sees the Federal Funds Rate (FFR) at 4.50% in early 2023.

Elsewhere, Fed’s Vice Chair, Lael Brainard, said, “monetary policy will be restrictive for some time to ensure that inflation moves back to target over time.” She confirmed that the pace and size of further moves would be data-dependent.

In the meantime, the US Dollar Index, a measure of the greenback’s value against its peers, is slight up at 113.273, bouncing off the day’s lows on the risk-off impulse sparked by Bailey’s comments.

During the European session, the ECB Chief Economist Philip Lane said that the ECB would impact the markets by hiking rates than selling its hefty pile of bonds on Tuesday. Given that the ECB raised rates from -0.50% to 0.75% in two months, expectations of another large size increase remained high.

What to watch

On Wednesday, the EU’s economic calendar will reveal the Industrial Production (IP) for August, with monthly and yearly figures estimated to persist in negative territory. On the US front, the calendar will feature the Producer Price Index (PPI) for September alongside Fed speaking.

EUR/USD Key Technical Levels