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No matter how much the opponents of the euro would like the EURUSD pair to return to parity again, their wishes are unlikely to come true. At the end of February, the regional currency became the second best performer of G10 after the U.S. dollar, and strong business statistics, record core inflation, and hawkish rhetoric from the ECB paint a bullish outlook for it. As soon as the USD gives up, the main currency pair will take off, giving grounds for talks about the recovery of the upward trend. However, let's not get ahead of ourselves.
Dynamics of European business activity
While investors focus on Jerome Powell's speech to Congress and February employment data in the U.S., the events taking place in the euro area remain behind the scenes. And it seems to be just as hot as in the U.S. The ECB hawks and centrists are rolling barrels at each other, hinting at a major split at the Governing Council meeting in March. The futures market expects the deposit rate to rise by 50 bps and is drawing a peak of 4.1%, but not everyone is happy about it.
Ignazio Visco, governor of the Bank of Italy, wonders how anyone can talk about a rate hike above 4% in the current environment of uncertainty. He and fellow Governor Fabio Panetta are calling for a measured approach, where decisions are made from meeting to meeting based on incoming data. However, the hawks are not relenting. Austria's Robert Holzmann wants to increase the cost of borrowing by 50 bps until it reaches 4.5%, while Isabel Schnabel does not yet see rates at a restrictive level. In her opinion, monetary policy needs to be tightened until its consequences begin to be felt in the markets and in the economy.
ECB President Christine Lagarde will have to compromise at the March meeting and Nordea Markets expects her to raise the deposit rate by 50 bps, followed by an indication of another half-point gain in May and less hawkish rhetoric than markets expect.
The Federal Reserve also adheres to a similar position to Schnabel. Investors have completely abandoned the idea of a dovish reversal and now believe that the federal funds rate will remain elevated until the labor market seriously cools down. As monetary tightening continues, should we be surprised by the rally in Treasury yields and the strength of the U.S. dollar?
U.S. Treasury yield dynamics
Thus, we got a battle between two strong currencies, each awaits for a weakness from its opponent. The U.S. dollar is the first to risk showing it in the case of disappointing employment statistics for February.
Technically, on the daily chart, EURUSD is trying to return to the boundaries of the fair value range 1.0575–1.0735, having won back the doji bar on the way. The task looks difficult, but not impossible. If it succeeds to consolidate above $1.0575, let's start thinking about buying the euro.
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