Euro Rate Talking Points
EUR/USD attempts to retrace the decline triggered by the stickiness in the US Consumer Price Index (CPI) as it trades back above parity, but the Federal Reserve interest rate decision may influence the near-term outlook for the exchange rate as the central bank is expected to retain its current approach in combating inflation.
Fundamental Forecast for Euro: Neutral
However, EUR/USD may continue to track the negative slope in the moving average as the Federal Open Market Committee (FOMC) is expected to deliver another 75bp rate hike, and the committee may prepare US household and businesses for a further rise in US interest rates as “participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate.”
As a result, a 75bp rate hike along with a hawkish forward guidance may produce a bearish reaction in EUR/USD as the European Central Bank (ECB) shows little interest in implementing a restrictive policy, and it remains to be seen if the fresh projections from Chairman Jerome Powell and Co. will influence the near-term outlook for the exchange rate as the central bank is slated to update the Summary of Economic Projections (SEP).
The Fed may utilize the SEP to further its commitment in combating inflation if Chairman Powell and Co. project a steeper path for US interest rates, and another upward adjustment in the interest rate dot-plot may push EUR/USD towards the yearly low (0.9864) as the FOMC sticks to its hiking-cycle.
At the same time, more of the same from Fed officials may point to a looming shift in FOMC policy as the Fed Funds rate is forecasted to peak around 4.00%, and EUR/USD may stage a larger recovery over the near-term should the central bank show a greater willingness to implement smaller rate hikes.
With that said, EUR/USD may face range-bound conditions ahead of the Fed rate decision as market participants wait for the fresh forecasts from Fed officials, but the exchange rate may struggle to retain the advance from the yearly low (0.9864) should the central bank project a steeper path for US interest rates.
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
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