• EUR/USD saw some choppiness but has largely stuck to the 1.2150 mark.
  • Comments from Fed Chair Powell for the most part did not shift the dial as to the market’s Fed policy expectations.

EUR/USD saw some choppiness around the time of the US equity cash open and during the first day of Fed Chair Jerome Powell’s semi-annual testimony to Congress but has for the most part not traded too far from the 1.2150 mark, which has acted as an anchor of sorts. At present, the pair trades flat on the day.

Driving the day

The euro has traded almost entirely at the behest of the US dollar on Tuesday amid a lack of any meaningful fresh Eurozone-related fundamental catalysts. Broadly speaking though, the currency continues to underperformer the likes of GBP and other risk-sensitive currencies, likely in part because of continued concerns over the bloc’s sluggish vaccine rollout and concerns about the spread of worrisome Covid-19 variants; German Chancellor Angela Merkel is said to have warned her parliamentary party that the country is in the grips of a third Covid-19 wave.

Turning to USD flows then, which dictated the action in EUR/USD for the most part on Tuesday. A stronger than expected US Conference Board Consumer Confidence February survey, which saw the headline index rise to 91.3 versus analyst expectations of a modest drop to 90.0, was broadly ignored, with markets instead focused on what Fed Chair Jerome Powell had to say to Senators at his semi-annual testimony before Congress.

The Fed Chair stuck to the usual dovish FOMC script, which in essence had him reassuring investors and the public that, though the outlook for the economy is becoming more optimistic amid vaccine rollouts and fiscal stimulus, ultra-accommodative Fed policy is not going anywhere any time soon as the Fed remains a long way off of its dual mandate policy goals. In other words, Powell reiterated that rates will remain near zero until full employment has been reached and inflation has sustainably moved back above the bank’s 2% target, while the pace of bond buying will not be reduced until “substantial” progress has been made towards these goals.

That Powell would reiterate the above was very much expected and came as a surprise to no one. Rather, markets were much more focused on what the Fed Chair would have to say about the recent ramp higher in US bond yields and on inflation; on the former, Powell did not express any concern and instead attributed the move to positive fundamental developments (i.e. expectations for higher GDP growth and inflation), perhaps a little less dovish of a stance than some had hoped. However, Powell came across as dovish on his outlook for inflation and played down fears that the US economy might overheat in the coming years.

In terms of what the above all means for the question as to when the Fed will start to taper its QE programme, Powell’s comments have not exactly left markets much the wiser. ING suspects that, “given the fears of a potentially disruptive taper tantrum 2.0, we strongly suspect that when the Fed does start to taper asset purchases it will be gradual and involve a “twist” operation, similar to how the Bank of Canada’s policy has evolved.”

ING reminds us that that the BoC “recalibrated” its QE program by lowering its weekly asset purchases from CAD 5B to CAD 4B but shifting purchases towards the longer end of the yield curve, something which they argued was a more effective use of resources since the long end of the curve has a “more direct influence on the borrowing rates that are most important for households and businesses”.

“Given (this) option there is no reason to think that tapering couldn’t happen before the end of the year”, posits ING, though they do not think that the taper will result in a “taper tantrum 2.0”.