The Euro US Dollar (EUR/USD) exchange rate fell on Thursday. The currency pair was pulled lower by the Federal Reserve’s 0.75% interest rate hike overnight, as well as hawkish signals for Fed policymakers.
At time of writing the EUR/USD exchange rate was at around €0.9756, which was down roughly 0.6% from that morning’s opening figures.
The US Dollar (USD) leaped on Thursday following the Fed’s interest rate decision overnight. A persistent risk-off market mood also boosted the safe-haven ‘Greenback’.
The central bank hiked interest rates by 0.75% in a bid to curb stubbornly high inflation. Whilst the move had largely been priced in by markets, a surprisingly hawkish statement from Fed President Jerome bolstered USD.
Reports in the run-up to the Fed’s meeting had indicated that the central bank may begin to slow its pace of policy tightening in the coming months. Whilst Powell stated that the Fed was considering its pace of rate hikes, he went on to signal that there was ‘still some ground to cover’. The hawkish signals continued to push USD higher over the course of Thursday.
Many economists remained convinced that the Fed would slowdown hikes soon, however. This consensus capped gains for USD.
‘We anticipate a final 50bp for February, but by the time of the March FOMC meeting we are predicting the US to have entered a recession with slowing rents, falling used car prices and rapidly receding corporate pricing power contributing to far more convincing signs that inflation is moderating.’
Euro (EUR) Exchange Rates Underpinned by Hawkish ECB Rhetoric
The Euro (EUR) edged lower on Thursday despite a risk-on market mood. A resurgent US Dollar (USD) sapped demand for the single currency, as well as mixed developments in the Russia-Ukraine conflict.
Whilst Russian attacks on Ukrainian infrastructure continued overnight and weighed on EUR, Russia’s re-joining of the UN grain deal helped to limit losses.
The single currency was also underpinned by hawkish comments from European Central Bank (ECB) President Christine Lagarde. Lagarde signalled that a recession in the Eurozone would not be enough to tame soaring prices.
Hawkish comments from other ECB policymakers on Thursday also lent support to EUR.
‘The ECB should not refrain from further hike rates, we need to increase them further to bring inflation down to our mid-term target’
Additionally, a slip in Eurozone unemployment in September kept the Euro from falling further. Unemployment fell to a record-low of 6.6%, indicating a tight labour market in the trading bloc.
Looking ahead for the Euro, the final reading of October’s PMIs on Friday could pull the single currency lower if they print as forecast. Eurozone service sector output is expected to have a third consecutive month. A contraction in Germany’s service sector could have a similar effect.
On the other hand, a speech from ECB President Lagarde could help to underpin the single currency if she reinforces bets on further interest rate hikes.
For the US Dollar, a forecast further expansion in US private sector output on Thursday could push the currency higher. On the other hand, a widening in the US trade deficit could gap any gains for USD.
On Friday, key employment data is likely to cause movement in USD. An expected slowdown in non farm payrolls figures could dampen enthusiasm for the currency, although the evidence of a tight labour market could lent support to the US Dollar.
Also on Friday, unemployment figures for October could also bolster USD if they remain close to 29-month lows.
Finally, the impact of the Fed’s interest rate decision and hawkish rhetoric from Powell could cause further movement in USD.
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