EUR/USD suffers as notorious Fed hawk spreads his wings and German data disappoints

The risk-on mood in the forex markets took a hit today and the EUR/USD dropped to monthly lows following a double-whammy of bad news for USD bears.

Starting in the US, yesterday, the influential and notoriously hawkish Federal Reserve Governor Christopher Waller delivered a speech titled There’s Still No Rush at the Economic Club of New York.

The clue to Waller’s sentiments on interest rates is in the title. Waller has been well-known for trending hawkish, and this speech bore no surprises. Referring to January and February inflation data he said:

“…this new data… reinforces my view that there is no rush to cut the policy rate. Indeed, it tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2 percent.

I continue to believe that further progress will make it appropriate for the FOMC to begin reducing the target range for the federal funds rate this year. But until that progress materializes, I am not ready to take that step.”

While the immediate impact on the USD was limited, there was a brief lift on the news. The dollar also received some positive news from the S&P rating agency, reaffirming the US sovereign rating at AA+ on a stable outlook.

What really took the markets by surprise was a big drop in German retail sales in February, according to data released this morning. Following three months of declines, analysts expected a 0.3% rebound, but the reading came in at -1.9%, showing a steep and worrying decline in consumer confidence.

The grim data comes amid a general worsening of expectations for the EU’s traditional powerhouse economy. On Wednesday, 27^th March, Germany's 5 leading economic institutes slashed their 2024 GDP growth forecasts to 0.1%, down from 1.3% just six months ago.

The disappointing retail data had an immediate and severe effect on the EUR/USD, with price falling below 1.078 for the first time since 20^th February.

With the Easter break on the horizon, markets will look to US Personal Consumption Expenditures (PCE) Price Index data for February on Friday. If Waller is proved correct in his concerns, it will be hard to bet against continued strength for the USD.

Technical Analysis

The EUR/USD continued the downtrend that ensued on the 8^th of March, falling below 1.0800 (Fibonacci 23.8% of the December 2023- February 2024 downtrend) in the early European session on Thursday. Due in part to lower-than-expected German retail sales in February and a resurgent demand for the dollar, there is short-term bias to the downside.

EUR/USD Daily Chart on TradingView, prepared by Alison Heyerdahl

The technicals tell a similar story. The price moved below the three moving averages (50- SMA, 100-SMA, and 200-SMA) on Tuesday, while the Relative Strength Index is well-below 50, but not yet in oversold territory, signalling the potential for further downside moves.

A clear break below the 1.0788 level would leave the pair vulnerable to a sell-off down to the 1.0700 psychological handle, the next level of support. For the bulls to gain any significant momentum, a move above the 1.0950 level would have to be achieved.