- The Federal Reserve (Fed) states that more time is necessary to ascertain if and when the current escalation in interest rates will plateau. In the meantime, economic data will continue to be closely monitored, with no forecasted reductions in the rates until 2024.
- The European Central Bank (ECB) maintains its firm stance, confirming that the cost of borrowing will see another increase in July. Consequently, interest rates will sit at 4%, with no end to the increases currently foreseeable. It’s not until 2025 that they predict inflation will return to a rate of 2%.
- The Euro to US Dollar exchange rate (EurUsd) has reached the support level of 1.065 and experienced a robust rebound, in line with predictions. The prospect of the rate climbing back above 1.10 is a tangible possibility.
Hawks Fly High in Washington and Frankfurt
The market most likely had a sense of what was going to transpire with interest rates following the release of the U.S. inflation data last Tuesday. With an anticipated figure of 4.1% following April’s 4.9% (5.2% for the core data, down from the previous 5.5%), U.S. inflation played out exactly as expected. Consequently, market players turned to the Federal Reserve (Fed) for direction.
In a unanimous decision, U.S. central bankers elected to hit pause, waiting to examine new macroeconomic data. However, consensus suggested further increases might be on the cards. Fed Chair Powell didn’t disclose a schedule for new rate hikes, but affirmed that rate cuts won’t be on the table until 2024. By 2025, the cost of borrowing is predicted to reach between 3.25% and 3.50%. The era of zero (or near-zero) interest rates appears to be definitively a thing of the past.
Meanwhile, the OECD has put forth growth estimates for the U.S. for 2023 and 2024, with no cause for alarm. They project U.S. GDP growth at 1% in 2024, with inflation at 2.6%. The Fed forecasts marginally lower inflation at 2.4%, with a growth rate of 1.1% for the same year.
Shifting to Frankfurt, the European Central Bank (ECB) increased rates by the predicted 25 basis points, taking the benchmark rate to 4%. ECB President Lagarde indicated there is no foreseeable halt to rate hikes, with another increase due in July. While inflation has eased, it’s set to stay high for the foreseeable future, warranting vigilant and credible monetary policies. Year-end inflation estimates for the Eurozone have been revised upward to 5.4%, with an anticipated return to 2% only by 2025. Particularly, the core inflation prediction for the end of 2023 has been raised to 5.1%. The region’s GDP is projected to increase by 0.9% in 2023 and 1.5% in 2024.
Supportive Factors Bolster the Euro
The support level that has been steering the EurUsd dynamics with remarkable precision for months has spurred a resurgence in the European currency. This development has averted a potentially hazardous bearish break, which would have signified a flight to quality and a more assertive stance on rates from the Fed.
The more aggressive approach was indeed showcased by Lagarde, leading to the American dollar’s strength, indicated by an ADX above 30 points until a few days ago, dramatically dissipating following the central bank meetings.
Consequently, we’re aware of the critical level (1.07) below which the entire scenario would pivot. We also recognize the level at which a reversal pattern (head and shoulders) could be established. Moreover, we are confident that the bullish trend of the Euro remains strong with the 1.10/1.12 area potentially marking the end point of this initial bout of dollar weakness.
The bear market seemingly concluded, opening intriguing possibilities for the Euro this summer.
However, there still remain some technical uncertainties. One pertains to the behavior of the RSI oscillator, which, after reaching a double peak above 70 in the recent weeks, never descended into oversold territory. This pattern resembles that of 2021, which preceded a formidable dollar rally. If history were to repeat itself, the Fed might be unexpectedly compelled to hike rates again before.