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EUR/USD hits 6-month high after Fed, focus shifts to ECB By Investing.com




Investing.com — The pair’s reaction to the Fed meeting may come as a surprise, as the euro marked a fresh six-month high of 1.0696 shortly after an event widely seen as hawks. .

While the Fed has slowed the pace of rate hikes as expected, the dotted chart and hawkish elements have diminished the importance of pivot policy.

EUR/USD against aggressive Fed surprises

The dot chart, which represents the proportion of FOMC members, shows that the average expectation for interest rates by the end of 2023 is currently 5.1%, compared with the 4.6% forecast in the projections in September.

A breach of the symbolic 5% mark is significant, as market expectations have generally been aligned below the 5% mark following the release of lower-than-expected numbers on Tuesday.

Furthermore, Powell said during the press conference:

“We anticipate that a sustained increase in the target range for the Federal Funds rate will be appropriate to achieve a sufficiently restrained monetary policy stance to bring inflation back to 2% on track.” time.”

The head of the Fed also clarified:

“It doesn’t matter how fast we go now… It’s much more important to think about where the final level is, and then at a certain point the question becomes where will we go? limited for how long.”

Powell also touched on the topic of potential rate cuts, saying, “I wouldn’t see us considering a rate cut unless there is confidence that inflation will fall to 2%,” excluding any any rate cuts before 2025 based on the central bank’s current inflation projections.

However, while these hawks weigh on equities and other risky assets like cryptocurrencies, the impact on the market remains limited, with volatility in both directions. versus the release, allowing EUR/USD to mark a new 6+ month high near 1.07 .

EUR/USD faces ECB meeting test

EUR/USD corrected slightly to 1.0650 just before the start of the European session, amid caution ahead of developments. The ECB is also expected to slow the pace of rate hikes.

However, it appears that this decision to slow down the pace of rate hikes is as uncertain as is the case with the Fed, as ING pointed out in a note published last week.

In particular, the bank pointed to recent comments by ECB Executive Board member Isabel Schnabel, who said that “the data coming in so far suggests that the possibility of slowing the pace of rate adjustment remains limited remains limited. , even if we are approaching the “neutral rate” estimates. As a result, ING concluded that a rate hike “75 basis points is clearly still under consideration.”

According to the bank, such a move would certainly have a strong bullish effect on EUR/USD, and expect the pair to rally to 1.0750 in this scenario.

Moreover, even in the event of a 0.5% rate hike as expected, ECB President Christine Lagarde’s speech could contain hawkish details, as “the ECB seems increasingly concerned that the measures The announced fiscal stimulus and support measures could prolong inflationary pressures,” according to ING.

So Thursday could see EUR/USD continue to move in an animated fashion and caution will be the order of the day.

(Translated from French)

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