EUR/USD grinds lower on a firm US dollar, risk-off impulse

• EUR/USD prepares to finish the week with hefty losses above 2%.
• Fed officials insist it’s not time to declare “victory” while adding that further rate hikes are coming.
• ECB Schnabel and Kazaks expect another rate hike in September.

The EUR/USD slides for the second consecutive day due to broad US dollar strength, courtesy of a dampened market mood spurred by Fed officials’ commentary, while US Treasury bond yield rise. At the time of writing, the EUR/USD is trading at 1.0035 below its opening price after hitting a daily high at 1.0095.

The EUR/USD reached a daily low at 1.0032, approaching parity again. The US Dollar Index, a gauge of the buck’s value vs. six peers, edges up almost 0.60%, sitting at 108.129, at six-week highs, while the US 10-year T-bond yields are up eight bps, at 2.978%.

EUR/USD drops on hawkish commentary

Fed officials are to blame for recent US dollar strength. On Friday, Richmond’s Fed Thomas Barkin said there’s a lot of time to decide on the size of the September meeting rate hike, adding that the Fed needs to move to restrictive territory. Barkin’s comments echoed Kansas City Fed George, who said that although July CPI data was “encouraging,” the case for further tightening remains strong,

Meanwhile, on the hawkish side, San Francisco’s Fed President Daly said that a 50 or 75 bps would be appropriate in the next meeting while pushing back against rate cuts in 2023. In the meantime, the St. Louis Fed James Bullard said the leans toward a 75 bps increase next month and stressed that it’s too soon to say inflation has peaked.

Minnesota’s Fed Neil Kashkari said that the Fed is committed to getting inflation under control, even though he’s unsure that the Fed can lower inflation without triggering a recession.

In the meantime, on the Eurozone side, the lack of economic releases on Friday left EUR/USD traders leaning towards ECB’s commentary, led by Schnabel. In an interview with Reuters, she said that “any decision is going to be taken on the basis of incoming data. If I look at the most recent data, I would say that the concerns we had in July have not been alleviated.” Echoing Schnabel's comments was ECB’s Kazaks, noting that “we will continue to increase rates” so as to prevent inflation from becoming entrenched.

Elsewhere, money market futures have fully priced a 50 bps Fed rate hike, while odds of a 75 bps lie at 82%. Across the pond, STIRs markets have been fully priced a 50 bps by the ECB.

What to watch

The Eurozone economic calendar will feature French and German S&P Global PMIs, and German IFOs report, which are expected soft. On the US front, the docket will feature S&P Global PMIs for August, claims for unemployment, the Fed Jackson Hole Economic Symposium, where Fed Chair Jerome Powell will speak, and the Fed’s favorite gauge of inflation, PCE for PCE July,

EUR/USD Key Technical Levels