Euro US Dollar (EUR/USD) Exchange Rate Directionless as US Investors Brace for Federal Reserve
The Euro US Dollar (EUR/USD) exchange rate is muted this morning as USD firms ahead of the Federal Reserve decision.
At the time of writing the EUR/USD exchange rate is trading at around $1.0012 which has dropped roughly 0.2% from this morning’s opening rate.
US Dollar (USD) Firms ahead of Fed Rate Decision
The US Dollar (USD) ticked higher this morning as risk appetite weakens ahead of the Fed’s rate hike decision on Wednesday.
Investors are expecting a 75bps rate hike, which has been underpinned by hawkish comments from Fed policymakers. If forecasts prove correct, it will be the third consecutive hike of this nature as the US central bank tries to tame inflation.
Markets believe interest rates could rise as far as 4% by year’s end.
This, in turn, is stoking recession fears, as global investors worry about the impact of tighter US monetary policy. The last time the Fed projected increases this large was before the 2008 financial crisis.
Both the downbeat mood and the expectation of a large rate rise at tomorrow’s meeting are underpinning the US Dollar today. However, USD investors may be somewhat hesitant to place aggressive bets ahead of the decision.
Euro (EUR) Muted ahead of ECB President Speech
Meanwhile, the Euro (EUR) is muted ahead of European Central Bank (ECB) President Christine Lagarde’s speech this afternoon.
EUR investors suspect that the ECB will continue with its aggressive monetary policy tightening, with further sharp rate hikes on the way.
Last month the ECB hiked by 75bps, which brought its main refinancing rate up to 1.25%. This surprised but pleased EUR investors, who are now expecting a similar rise in this week’s meeting.
Investors will be paying keen attention to Lagarde’s speech this afternoon. Any hints or hawkish comments could further underpin investors’ expectations.
However, if her rhetoric is more dovish than hoped, then this could cap the Euro’s gains in the wake of the address.
Euro US Dollar Forecast: USD to be Lifted by Rate Decision?
Looking ahead, the Euro US Dollar exchange rate could see significant movement around the Fed interest rate decision on Wednesday evening.
USD investors are hopeful for another 75bps hike, which could see the US Dollar strengthen. However, such a move may already be priced into the American currency, limiting its gains.
Markets may be more focused on the Fed’s future pace of interest rate rises. If recession fears weigh on policymakers, then they may indicate smaller hikes to come at future meetings. This would likely dent USD.
Meanwhile, Eurozone data is in short supply over the next few days, with investors focusing on Lagarde’s speech this evening. If ECB signals remain hawkish ahead of October’s next rate decision then the Euro could enjoy tailwinds.
Otherwise, the EUR/USD exchange rate will likely be driven by risk appetite and news from Ukraine.