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  • EUR/USD slipped about 100 pips on Thursday following remarks from Fed Chair Powell.
  • Technicians point to the February low at 1.1950 as the next key area of support.

Thursday was not a good day for EUR/USD, with the cross coming under pressure amid a broad pick up in the US dollar’s fortunes in wake of comments from Fed Chair Jerome Powell. Prior to Powell’s remarks which started at 17:05GMT, the pair was trading just to the south of the 1.2050 mark. At the time of the Thursday FX close, EUR/USD was trading in the 1.1960s, a near 90 pip drop. On the day, the pair closed with losses of around 100 pips or about 0.8%.

Technicians now have their eyes on the February low at 1.1950. A break below this level could open the door to an extended move towards the 1.1900 level, though there is some support around 1.1920 that the pair will need to contend with. Longer-term bears might be targeting a move as low at the pair’s 200-day moving average, which sits just above the 1.1800 level.

Fed Chair Powell Recap

As mentioned, the driver of FX markets on Thursday was Fed Chair Powell’s remarks at an online WSJ event which started at 17:05GMT and lasted for around half an hour. In terms of his commentary on the outlook for the US economy and the outlook for interest rates and the Fed’s asset purchases programme, Powell stuck to the usual dovish script. To summarise Powell’s remarks, on the economy; though the outlook has brightened, the US economy remains a long way from the Fed’s goals (lots of talk about how the true jobless rate remains close to 10M) and though inflation is expected to pick up as the economy reopens and due to base effects over the coming months, Powell does not think this will constitute anything more than a transitory rise in inflation given that 1) in recent years deflationary pressures have been stronger than inflationary pressures and 2) inflation expectations remain well-anchored around 2%.

On policy; given the fact that it will take the Fed a long time to reach its goals, Powell still expects rates to remain close to zero for a long-time and the Fed will only start hiking rates once it has met its dual mandate for full employment and inflation averaging moderately above 2% for a time. On QE, Powell reiterated that the Fed will not taper asset purchases until “substantial” progress has been made towards the dual mandate.

The reason why markets have reacted the way they did (i.e. bond yields spiking, the USD picking up and stocks dropping) is because, when pressed multiple time on how the Fed might respond/deal with “disorderly” bond market conditions, Powell refused to get drawn into talking about any specific Fed policies. While he did note that last week’s bond market move caught his eye, he made no mention of yields curve control, weighted average maturity extension or operation “twist” and refused to talk about how the Fed might manage market functioning if the supplementary leverage ratio requirement relief that banks have been enjoying (which means banks don’t have to hold reserves on their treasury holdings) is not extended beyond March.

Given that these are topics that other Fed members have spoken on in recent days, markets seem to have expected that Powell would also speak on these matters. Not the case. Though Powell is likely holding intense discussions on these issues with his colleagues, any final decisions on these matters (i.e. how the Fed might respond to disorderly bond markets) is yet to be made – the final decision on this is likely to be made in two weeks’ time at the upcoming FOMC meeting.