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EUR/USD
EUR/USD shows small positive moves around 1.1485 during Monday's first Asian session. However, upside for the major currency pair may be limited given the US Federal Reserve's (the Fed) hawkish rate hike and tensions in the Middle East. Today, ECB President Christine Lagarde is expected to deliver her speech. During the September policy meeting, the Fed lifted interest rates by 0.25 percentage point. The new Fed Chair Kevin Warsh voted for a unanimous rate hike and supported the hawkish stance, adding that there will be additional hikes in the next few months. The Fed's hawkish stance may support the USD and serve as a headwind for the major currency pair. The Iranian army made another threat to retaliate against US military bases in the Middle East as US President Donald Trump warned about the likelihood of new strikes by the US military, according to NBC News. The prospect of an extended period of hostilities in the Middle East would support safe-haven flows and strengthen the US dollar. Boris Vujcic, the ECB vice president, said high oil prices are driving market expectations of interest rate rises. Still, the authorities will base future decisions on a broader range of economic data. The money market is pricing in three or four more hikes over the course of next year, with the next one potentially coming in October, Reuters said. The deposit rate will be lifted to 3.25% or 3.50%. Scotiabank's strategists also point out that the "outlook for relative central bank policy seems to be stabilising" as markets begin to reassess the immediate threat of monetary policy tightening by the ECB. It is mentioned that policymakers still "are overwhelmingly hawkish," with their tone driven by both "energy-related inflation pressures and growth." On the data side, ScotiaBank stresses that "fundamental newsflow has been sparse except for a better-than-expected German PPI reading," supporting the cautious tone of ECB policymakers as the policy outlook between the ECB and the Fed balances out. Kashkari of the Fed gave an even less aggressive speech, reflected in the FXS Speechtracker rating of 6.2/10, close to the average of 6.3/10. The stress on the fact that inflation is still too high and not only due to the price of oil does not change the hawkish stance of the Fed, while the talk about the robust growth and the strong American economy and growing productivity adds some optimism that it is possible to reduce inflation without undermining the growth process. The statement that the bond market, not the Fed, is responsible signals a shift in roles. The FXS Fed Sentiment Index fell to 150.61 from 152.08, showing a slight retreat in hawkishness compared with previous communications. Nevertheless, because the index remains well above the 100 threshold, the Fed remains hawkish; even after the soft turn in sentiment revealed by the FXS Speechtracker, markets should expect an inflationary bias in Fed policy.
