How to Play the EUR/USD Ahead of Fed, ECB Rate Decisions
Investing.com | Jun 13, 2023 21:23
- Fed may pause interest rate hike cycle at Wednesday meeting
- Meanwhile, ECB could hike with 2008 peak in question
- EUR/USD could move up following expected decisions by both banks
The releases of US and euro zone inflation data this week are set to intensify volatility in the Forex market in the coming days.
In the US, forecasts suggest the downtrend could continue, with CPI reaching 4.1% on a YoY basis. There is also optimism regarding a decrease in core inflation. These figures will set the tone for the markets ahead of the Fed's decision.
Source: Investing.com
Similarly, in the euro zone, headline CPI is expected to slow down to 6.1% on a yearly basis, while core CPI could drop to 5.3%.
And if that wasn't enough, the Federal Reserve (Fed) and the European Central Bank (ECB) will likely close out their rate hike cycles. Like inflation data, these decisions will play a crucial role in shaping the market sentiment for the next few weeks.
The general expectation in the market is that the Fed will likely pause its cycle tomorrow. On the other hand, the ECB is expected to raise interest rates again, nearing the gap between the two rates.
Will the Fed Surprise Markets With a Hike?/h2
In recent months, market expectations for the level of interest rates in the U.S. from month to month have fluctuated. However, as we approach the decision day, it is widely anticipated that the Fed will pause further interest rate hikes.
This aligns with Chairman Powell's remarks regarding the need to assess the impact of previous rate hikes on the economy. Nevertheless, the market continues to view this pause as temporary, with a probability of nearly 60% that the Fed will resume raising rates from July onward.
Why does the market assume further increases despite the decline in inflation?
It appears that the continued strong labor market, combined with the negative surprise of the core PCE index, which rose to 4.7% y/y in April, may force Federal Reserve officials to maintain a hawkish stance.
But this seems to have already been discounted by investors.
Consequently, the lack of a surprise hike as early as tomorrow's meeting could be the starting point for a weakening of the US dollar.
ECB to Continue Hiking/h2
Given that the European Central Bank started its hike cycle after the Fed, the next two meetings should be marked by 25bp hikes. This means that we should witness a leveling off of the 4.25% level that was reached in 2008.
Whether the ECB stops there above all depends on the dynamics of
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