EUR/USD prints fresh YTD lows under 1.1250 as Powell renominated as Fed chair

• EUR/USD printed fresh YTD lows on Monday in the 1.1230s after Powell’s renomination as Fed chair.
• Markets reacted hawkishly as dovish Brainard bets were priced out and participants bet on a hawkish Fed shift.
• The pair has since recovered back above the 1.1250 mark.

EUR/USD has seen choppiness in recent trade, dropping from around 1.1280 to fresh year-to-date lows in the 1.1230s, before rebounding back above 1.1250, where it trades lower on the day by about 0.3%. The sharp drop in recent was triggered by the news that the White House has decided to reappoint current Fed Chair Jerome Powell for a second term. Lael Brainard, currently a member of the Fed’s Board of Governors and was also touted for the position as Fed Chair, will take the position as Vice Chair of the Fed.

Hawkish reaction as Powell renominated

The move lower in EUR/USD reflects a broader hawkish market reaction to the news of Powell’s renomination. US 2-year yields rose as much as 6bps to fresh highs since March 2020 above 0.55% and the 5-year yield surged nearly 8bps to hit its highest since February 2020 at not far from 1.30%. Meanwhile, the December 2022 eurodollar future (a proxy for market expectations for the Federal Funds rate) dropped 10bps to fresh year-to-date lows at 98.965, having closed last Friday at 99.065. That implies markets are pricing 10bps in addition rate hikes by the end of next year now that Powell has been renominated for a second term.

This reflects an unwind in “dovish risk” presented by a possible Brainard nomination. A Fed under Brainard would have been expected to (by most market participants) to have a higher tolerance for a more prolonger overshoot on its inflation target and to place more emphasis on the labour market recovery. It may also reflect the fact that, with his renomination all-but secured (he should easily be approved as Fed Chair again in the Senate), Powell can now shift hawkishly on policy without fear of upsetting the White House.

EUR/USD on the ropes

A rebuilding of hawkish Fed expectations adds to the growing pile of reasons to favour further EUR/USD downside. As the pandemic in Europe worsens and Germany gets closer to locking down (Chancellor Angela Merkel on Monday called for tougher restrictions), the Eurozone economy is expected to take a hit in Q4 2021. This adds more reasons for the ECB to be dovish. The bank was already dovishly insisting that it would not react to what it sees as a transitory spike in inflation and can now use lockdown/pandemic related-economic weakness to further justify this stance. Some are calling for the PEPP QE programme to be extended in March, given that the emergency phase of the pandemic will not yet be deemed over (a condition for the ending of the programme).

The next area of key support resides in the 1.1140-1.1170 region, an area that will be closely watched by many of the bears. But technicians do note that EUR/USD is now heavily oversold, with its 14-day Relative Strength Index (RSI) score now back under 30.00 again. A technical correction in the coming days back to the 1.1300s could be on the cards, but may ultimately be seen as an opportunity to reload shorts.