US recap: EUR/USD’s rebound on ECB’s 75-bp hike faces hawkish Fed

Sept 8 (Reuters) – The dollar index eased slightly on Thursday, shedding gains that followed hawkish comments from Fed Chair Jerome Powell as weakness associated with the ECB’s historic 75bp rate hike reappeared in late trading.

Markets are pricing in a third straight 75-bp Fed hike at the Sep. 21 meeting, but broad profit-taking on overbought dollar positions is part of the mix ahead of next week’s key US CPI and retail sales reports.

EUR/USD’s initial rise following the ECB hike came as there was some doubt whether the ECB would hike rates 50bp or 75bp, which sent 2-year bund yields up 31.8bp versus a 4bp rise in 2-year Treasury yields.

EUR/USD ran into sellers by the falling 21-day moving average on Powell’s comments and traders remain wary about the euro zone’s economic prospects compared to the US

The ECB shifted its 2023 GDP forecast sharply lower and inflation forecast higher. The EU and UK are scrambling to provide fiscal relief to offset the surge in energy costs since the pandemic receded and Russian energy supplies were throttled.

The Fed is less constrained since the US is a major energy producer and natgas exporter. Even after the 75bp hike to 0.75%, the ECB is well behind the Fed’s current 2.5% policy rate, with a third 75bp hike expected on Sept. 21.

Before then attention will be on next week’s US CPI and retail sales reports and energy-related issues.

EUR/USD recovered to about flat, but below its high of 1.0030 on EBS near the falling 21-DMA at 1.0038. The 47bp narrowing of the 2-year bund-Treasury yield spreads since August’s lows offers some support, as does broader consolidation of dollar gains since Wednesday’s peak.

That peak seemed timed by USD/JPY’s 24-year high Wednesday at 144.99 on EBS that was buttressed somewhat by broadening Japanese warnings about the yen’s rapid retreat.

USD/JPY was up 0.2% Thursday, but well within Wednesday’s 142.75-144.99 range. The BOJ’s negative interest rates and yield curve control leave the yen vulnerable. But the overbought USD/JPY may need US CPI and retail sales data to keep strong Fed hike expectations intact to overcome 145 and FX intervention unease.

Sterling was modestly lower amid choppy trading as the market onboarded UK plans for papering over the looming energy crisis as the BoE finally got some yield competition from the ECB, as well as news that Queen Elizabeth died.

The Australian dollar’s early slip on RBA comments opening the door on slower rate hikes diminished as other central banks will eventually indicate the same.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)