EUR/USD upside risks remain despite Fed rhetoric

Jan 20 (Reuters) – EUR/USD traded lower Friday as US rate gains underpinned the dollar but price action suggests higher levels are likely as Federal Reserve rhetoric isn’t scaring away longs.

Fed vice chair Lael Brainard said Thursday the central bank is still probing for interest levels adequate to tame inflation.

Her comments helped drive US rates and yields up, but dollar gains have been minimal which suggests investors may not be taking them to heart. Eurodollar futures pricing suggests Fed rates cuts will be made sometime in the second half of, which likely hinders dollar gains.

European Central Bank President Christine Lagarde on Thursday pushed back against a report earlier this week suggesting a slower pace of hikes were coming. Lagarde said the ECB will continue hiking and leave rates in restrictive territory as long as it takes to bring inflation down.

Euribor futures have ECB cuts priced in for late 2023 or the first quarter of 2024.

German-US 2-year yield spreads tightened further to decrease the dollar’s yield advantage over the euro as investors may be giving the ECB more credence than the Fed.

Technicals highlight upside risks, with a monthly bull hammer in place and the monthly RSI rising. The 10-day moving average also gives support, and EUR/USD seems likely to test the 50% retracement of 1.2349-0.9528 and the April monthly high.

(Christopher Romano is a Reuters market analyst. The views expressed are his own.)