EUR/USD bounces off monthly lows, hovers around 1.1680

• ECB’s Villeroy and Lagarde are confident that inflation will moderate.
• Fed’s Powell said “have all but met” the test for bond tapering.
• Central bank divergence favors the US dollar outlook.

The EUR/USD slides during the day, trading at 1.1684, recording a 0.10% loss at the time of writing. The market sentiment is dismal. Fears of inflation in the Eurozone were triggered by an ongoing energy crunch, while in the UK fuel shortages, do the same. Additionally, the Federal Reserve QE’s reduction boosts the safe-haven US dollar throughout the day.

The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six currencies, is rising 0.30%, currently at 93.70, while the 10-year benchmark note yield is advancing almost six basis points (bps), sitting at 1.543%.

ECB members and Fed’s Chair Jerome Powell hit the wires

During the European session, some ECB members crossed the wires. Francois Villeroy, Head of the Bank of France and Governing Council member, said that “There’s no doubt that inflation will be below 2% by 2023.”

Later, the ECB President Christine Lagarde said that we would only react to improvements in headline inflation that we are confident are durable. She added that “we are monitoring developments carefully but, for now, we see no signs that this increase in inflation is becoming broad-based across the economy.”

Meanwhile, in the US, the Federal Reserve Chairman Jerome Powell testified in the US Senate Committee on Banking. He made comments that there is a long way to go to achieve maximum employment.  He added that they “have all but met” the test for the bond-pandemic stimulus reduction.

Further, Powell said that “even with taper [the Fed] would be adding accommodation until mid-year next year.”

That said, the divergence between both central banks is clear. Although the ECB recalibrated its bond-purchasing program, the Federal Reserve’s recent hawkishness underpins the US Dollar. Hence, downward pressure on the EUR/USD pair is expected.

In the US economic docket, the August Trade Balance posted a deficit of $87.6 B, while the Conference Board Consumer Confidence dropped to 109.3 from 115.2, missing the forecast.

On Wednesday, in an ECB forum panel, the ECB president Christine Lagarde will join fellow central bank chiefs, BoE’s Andrew Bailey, BoJ Haruhiko Kuroda, and Fed’s Jerome Powell.

KEY TECHNICAL LEVELS TO WATCH