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Asset Watch

Will the euro give the bulls 200 reasons to smile?

 

Thursday, November 24, 2022

With risk assets roaring higher as investors attempt to orchestrate a Santa Clause rally, the laggards have become the leaders in recent weeks. Plus, thanks to the U.S. dollar losing its lustre, the euro has been a beneficiary.
However, with investors rejecting the EUR/USD’s intraday rise above its 200-day moving average on Nov. 15, will the second time be the charm?
Despite Fed officials repeated hawkish warnings, FX traders have largely ignored the implications of higher U.S. interest rates. Yet, on Nov. 22, Kansas City Fed President Esther George said it “could well take a higher interest rate for some time to convince households to hold on to their savings rather than spend it down.”

As a result, inflation is still materially elevated, and investors may underestimate the peak U.S. federal funds rate. Higher interest rates increase the dollar’s appeal because foreign allocators may purchase the greenback to invest in higher-rate U.S. bonds.

So, while the S&P 500 will soon have to decide if it can recoup its 200-day MA, the EUR/USD may provide important clues about risk appetite. If risk-on currencies like the euro struggle, the FX market’s hesitation could cascade across other assets. If not, a weaker U.S. dollar is often the green light for higher asset prices, especially commodities.

Therefore, will the EUR/USD achieve something it hasn’t since June 2021, or will the Fed’s war with inflation ensure that risk-off reigns for the next several months?


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