EUR/USD lost more than 100 pips on Tuesday and closed below 1.0550 in response to the hawkish policy signals delivered by Fed Chair Powell at semi-annual testimony to Congress. The pair could dive below the 1.05 mark, economists at MUFG Bank report.

US Dollar to rebound further in the near-term

“Powell delivered two clear hawkish policy signals over the outlook for further monetary tightening. Firstly, he stated that the latest economic data ‘suggests that the ultimate level of interest rates is likely to be higher than previously anticipated’. The second hawkish policy signal that Powell delivered was the he re-opened the door to a quick return to larger 50 bps rate hikes.”

“The developments have clearly increased upside risks for the US Dollar. While we had not been expecting the Fed to deliver such a hawkish policy update yesterday, it does support our forecast for the USD to rebound further in the near-term.”

“We had maintained our forecast for EUR/USD to fall back to the 1.05 level by the end of Q1. It could fall further still if the Fed delivers a larger 50 bps hike this month.”