EUR/USD Rate Outlook Hinges on Fed Rate Decision

Euro Rate Talking Points

EUR/USD snaps the recent series of higher highs and lows following the European Central Bank (ECB) meeting, and the exchange rate may struggle to retain the advance from the monthly low (0.9632) as the Federal Reserve is expected to implement another 75bp rate hike.

Fundamental Forecast for Euro: Bearish

EUR/USD continues to pullback from a fresh monthly high (1.0094) as the ECB emphasizes that the Governing Council has “made substantial progress in withdrawing monetary policy accommodation,” and it seems as though President Christine Lagarde and Co. have little intentions of pursuing a restrictive policy as economic activity in the Euro Area is expected to weaken over “the remainder of this year and the beginning of next year.”

In contrast, the Federal Open Market Committee (FOMC) may continue to strike a hawkish forward guidance at its next interest rate decision on November 2 as the update to the US Personal Consumption Expenditure (PCE) Price Index shows another uptick in the Fed’s preferred gauge for inflation.

In turn, the FOMC may maintain its approach in combating inflation as “many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” and the committee may show a greater willingness to carry out a highly restrictive policy as the Non-Farm Payrolls (NFP) report points to a resilient labor market.

With that said, another 75bp Fed rate hike along with a hawkish forward guidance may drag on EUR/USD, and the exchange rate may face headwinds throughout the remainder of the year as FOMC plans to carry its hiking-cycle into 2023.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong