The euro has closed the gap but is in no hurry to rise

• Talks between the US and Iran are likely to take place.
• Divergence in monetary policy is supporting EURUSD.

EURUSD managed to close the gap down formed at the market open on Monday but is in no hurry to move higher. Investors prefer to wait for Iran’s participation in talks with the US and the outcome of those discussions. The ceasefire expires on 21 April, and Donald Trump says an extension is unlikely. The White House chief claims that the Americans continue to block the Strait of Hormuz and are threatening Tehran with more bombing.

Meanwhile, US investors are preparing for Kevin Warsh’s congressional hearings. The nominee for Fed chair believes that the central bank’s independence lies in its own hands. The US president may comment on the Fed’s decisions but cannot influence it. The nominee finds himself in an extremely difficult position, as some Republicans do not intend to support his candidacy while the Jerome Powell investigation is ongoing.

Donald Trump has promised to dismiss him from the Committee at the end of his term on 15 May if a new nominee is not approved. The power struggle is casting a shadow over the US dollar. The turmoil could put pressure on the greenback, as could the resumption of talk of a cut in the federal funds rate.

Kevin Warsh has repeatedly referred to Alan Greenspan. Greenspan kept rates steady during his tenure as Fed Chair, whilst other central banks were raising them. The rationale was the rise in productivity spurred by the Internet revolution. Artificial intelligence may also curb price growth, allowing the Fed to pursue a more accommodative monetary policy and putting pressure on the USD.

The euro was supported by a statement from Christine Lagarde, who said that the ECB would raise rates higher than expected if governments were too generous. They would provide significant assistance to households facing rising energy costs, but this could push eurozone inflation above 6%. In turn, this would force the European Central Bank to tighten monetary policy aggressively, bolstering the EURUSD by narrowing the interest rate differential between the ECB and the Fed.

The FxPro Analyst Team