- ECB expected to raise rates by 25 bp
- Federal Reserve hikes rates by 25 bp
- Powell signals a pause in June
The Euro to Dollar exchange rate is trading quietly on Thursday before today’s expected ECB announcement.
The European Central Bank is widely expected to raise interest rates, but the question is by how much.
The European Central Bank (ECB) is widely anticipated to hike interest rates at its meeting later today. When the Fed next raises interest rates, will it be by 25 or 50 basis points? The headline and core readings for eurozone inflation in April showed no change and were quite near to predictions, so Tuesday’s data offered little new information. Both the headline and core CPI came in at 7.0%, exceeding the ECB’s 2% objective by a significant margin.
As part of its aggressive rate-tightening cycle, the Bank increased interest rates by 50 basis points (bp) in March. The danger of a recession due to a too rapid slowdown of the economy would grow with another 50-bp hike, which would aid in the fight against inflation. Investors are more likely to anticipate a 25-bp raise (80% probability) than a 50-bp hike (20% probability).
No one was surprised by the 25 bp rate hike the Federal Reserve announced on Wednesday. Investors cared more about what would happen next, and Jerome Powell gave a hint that, after 10 consecutive rate increases, this might be the last. The Fed appeared to take a more cautious stance by eliminating the possibility that “some additional” rate rises might be required from its rate statement. Modifications were made to the phrase “determining the extent” that additional increases would be necessary.
In the press conference, Powell sounded more hawkish than he had in previous remarks, saying that the economy, the labour market, and inflation had not responded adequately to the increased interest rates. To be quite clear, Powell added, “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
Who’s up for a rate cut? In his remarks, Powell stated that the inflation forecast did not warrant a rate decrease. However, the markets disagree and have already factored in a 51% possibility of a 25-bp cut and a 30% chance of a 50-bp cut for September. The Fed may or may not cut rates before the end of the year depending on how quickly inflation slows.
Technical Analysis of the Euro vs the Dollar
- EUR/USD tested resistance at 1.1088 earlier. The next resistance line is 1.1157
- 1025 and 1.0956 are providing support
