FX.co ★ EUR breaks ice and USD relies on Federal Reserve

In the middle of the week, EUR perked up eventually. EUR halted its decline but failed to put pressure on USD. The greenback is still reigning in the currency market amid geopolitical jitters.

On Wednesday, March 9, EUR slowed down its growth following a spike yesterday. On Tuesday, March 9, EUR sharply appreciated in light of macroeconomic data on the EU. Eurostat reported that the GDP of 19 countries in the euro block expanded by 4.6% in annual terms in Q4 2021. Gross domestic product grew by 0.3% sequentially. The EU economy increased 4.2% in Q3 2021. Germany's industrial production climbed 2.7% m/m in January 2022. Meanwhile, the single European currency is carrying on with its recovery.

EUR is trading steadily in anticipation of the ECB policy meeting that is scheduled for March 10. Markets are assessing risks, expecting the regulator to take appropriate measures. Besides, the central bank is due to present economic forecasts. Analysts at Active Trades believe that the ECB will hardly raise the key policy rate in 2022 despite escalating inflationary pressure.

At present, EUR's attempts to recover are caused by technical but not macroeconomic factors. Experts say that market sentiment will change if investors regain appetite for risk. The ongoing sell-off of risky assets is fueled by Russia's invasion of Ukraine. Investors are worried about the lack of progress in the Russia – Ukraine crisis that sparked off a crazy rally in the commodity market. It sets the stage for stagflation in the eurozone, experts warn.

Amid such economic and political turmoil, the US dollar serves as a traditional safe haven asset. The greenback is the clear winner in the currency market. Nevertheless, the US dollar slipped a bit against the euro on Wednesday, March 9. EUR/USD is trading at nearly 1.0920, making dips from time to time.

The US currency gave in to the euro ahead of the inflation report from the US. Market participants are concerned about further inflation acceleration last month. According to flash estimates, the US CPI could have skyrocketed to 7.9% on year in February after the 7.5% increase in January 2022. It is common knowledge that runaway inflation erases the value of a national currency. If the pessimistic forecast comes true, it will push the US dollar down.

Analysts at Morgan Stanley predict that the Federal Reserve will pursue the determined course on monetary tightening. Nothing will make the Fed abandon its plans, neither the Russia – Ukraine crisis, nor escalating political and economic headwinds. Morgan Stanley Chairman and CEO James Gorman reckons that the Federal Reserve will announce four rate hikes in 2022 regardless of current risks. From his viewpoint, the central bank will raise interest rates accurately without pushing the national economy into recession. Otherwise, the economy might slip into stagflation.

Experts share the viewpoint that the Federal Reserve will embark on the path of step-by-step monetary tightening. The US regulator has delivered a message that it will take well-rounded decisions, assessing all risks and advantages. The worst scenario for the US economy is insufficient measures taken by the US Fed that could prevent a recovery to decent economic performance, Morgan Stanley sums up.