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Dec 16 - 03:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Drifts Lower On Lingering Rate Hike Fallout Fears

By Randolph Donney  —  Dec 16 - 01:40 PM

The dollar index managed modest gains on Friday as the higher rates for longer mantra from the ECB and Fed this week rattled financial markets worried about economic fallout from a more robust inflation fight.

Comments from governing council member Klaas Knot nA5N32P00A and Finnish central bank chief Olli Rehn nL1N3360KP reinforced Thursday's hawkish ECB outcome.
Less negative than forecast euro zone PMI readings nL1N3360HS also hinted higher ECB rates and QT nL1N3350EK may be needed to slow the economy enough to bring inflation under control.

New York Federal Reserve President John Williams said he did not expect the U.S. to fall into recession and that it was possible the Fed raises rates further than forecasts released by the central bank Wednesday nN9N30X00U.

San Francisco Federal Reserve President Mary Daly said the jobless rate would have to rise to get the labor market back in balance and that terminal rates could be held for at least 11 months nS0N30D054.

Nevertheless Treasury yields fell in the afternoon led by short-term rates in a further flight to safety and recession hedging.

EUR/USD fell 0.2% as the 33bp surge in 2-year Bund yields and 40bp in 2-year BTP yields from Wednesday's lows had already priced in much of the tighter ECB policy and risk-off angst, though Italy's finances will remain on the risk radar nL1N3360FM.

EUR/USD held just above Thursday's low and the tenkan at 1.05925/00.

USD/JPY fell 1%, dragged down by falling Treasury yields and some steadying in U.S. stocks from earlier lows.
No policy change is expected at Tuesday's BoJ meeting, leaving the Fed to drive USD/JPY.

Sterling was steady after bouncing off early losses that held key support by 1.2100 nL1N3361HI, looking past weak UK retail sales nL8N33614O and mixed PMI results nL1N3360K4.
This risk-sensitive pair basically mimicked intraday moves in S&P futures.

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Source:
Refinitiv IFR Research/Market Commentary

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