November 10, 2023 – Written by Ben Hughes
STORY LINK Euro-Dollar rate: EURUSD weakens as Fed’s Powell maintains hawkish stance
The Fed’s hawkish rhetoric sent the euro (EUR) lower against the US dollar (USD) on Thursday and CIBC expects the pair to weaken further to 1.03 by the end of 2023.
At the time of writing, the Euro-Dollar exchange rate (EUR/USD) was 1.06699.
In a speech on Thursday, Federal Reserve Chairman Powell said the central bank was not convinced it had reached a sufficiently restrictive stance.
He added that the Fed is alert to the risks that stronger growth could undermine inflation progress, which could justify a monetary policy response.
Markets are still confident there will be no rate hike at the December meeting, especially since Powell said the Fed would continue to take a cautious approach.
The main impact was a decline in expectations that interest rates could be cut in the first half of 2023.
The dollar secured net gains following the comments, with EUR/USD falling to 1.0675 from previous highs of 1.0725.
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GBP/USD also fell to near 1.2230, while USD/JPY rose to 151.30.
Initial jobless claims in the US rose slightly last week to 217,000.
Current claims rose to 1.83 million last week from a revised 1.81 million previously, the highest level since May, suggesting demand for workers is weaker.
CIBC noted; “There are still some signs of dissonance in certain parts of the market. In fact, futures markets are still interested in pricing in Fed easing of nearly 100 basis points by the end of 2024. This compares to 77 basis points for the Bank of Canada and 76 basis points for the Bank of England.”
She assumes that the markets will have to continue to adjust their expectations; “The implication is that the market expects the Fed to be more reactive than other central banks in the coming year. But that doesn’t correspond to the basics on site.”
MUFG expects central banks to be very cautious about further interest rate hikes that would curb volatility.
MUFG still expects the Fed to remain on hold; “We would be surprised if the recent decline in yields was enough to make the Fed signal renewed confidence that it plans to raise rates in December.”
The Fed’s rhetoric continues to be closely watched.
On Thursday, Richmond Fed Chairman Barkin said: “I expect some sort of slowdown because I just have to assume that the net impact of these tightenings will ultimately hit the economy harder than it has so far.”
He added; “Whether a slowdown that calms inflation will require more from us remains to be seen, which is why I supported our decision to keep rates on hold at our last meeting.”
The euro continues to be affected by a lack of confidence in the eurozone economy.
According to Simon Harvey, Head of FX Analysis at Monex Europe; “The fundamentals of the European economy do not justify trading between the euro and the dollar at current levels. So if we get pushed back by Powell, that’s where it’s going to hurt the most.”
Traders are betting that the ECB will cut interest rates by around 90 basis points by the end of next year, from the current 4.0%.
Inflationary pressures in the Eurozone and the ECB’s rhetoric continue to be closely monitored.
Jussi Hiljanen, head of interest rate strategy at lender SEB, said: “2024 will be the real test of whether inflation continues to fall at a pace that justifies such early interest rate cuts that markets are already pricing in.”
According to Scotiabank; “Trend momentum signals remain bullish in intraday and daily studies, but intraday trend strength has weakened.”
It added; Risks remain focused on stronger EUR strength above 1.0650/1.0660, while EUR gains are likely to gain slightly more momentum above 1.0710/1.0720.”
Socgen expects dollar bears to remain cautious; “Last week’s data gave me a strong belief that the US economic cycle has finally turned and the peak has been reached for both the dollar and 10-year yields, but it is clear that the market as a whole is big Is afraid of getting caught again. ”
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TAGS: Daily currency updates, Euro-Dollar forecasts
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