Euro hovers near two-month low as hawkish Fed outlook weighs
- EUR/USD hovers near a two-month low as hawkish Fed expectations favour the US Dollar.
- Markets raise bets on an October Fed rate hike after resilient US economic data.
- The Euro struggles despite upbeat German Ifo figures and expectations of more ECB tightening.
EUR/USD hovers near a two-month low on Thursday as expectations of another Federal Reserve (Fed) interest-rate hike keep the US Dollar (USD) firmly supported. At the time of writing, the pair trades around 1.1372, remaining on the back foot for a fourth consecutive day.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.27 after touching an intraday high of 101.35, its highest level since July 29.
Markets see a growing chance that the Fed will raise interest rates again in October after delivering a 25-basis-point (bps) increase last week. Wednesday’s strong US PMI data and hawkish remarks from Fed officials have strengthened these expectations, with the CME FedWatch Tool placing the probability of a rate hike at around 65%, up from 55% a week ago.
US labour-market figures released on Thursday showed that Initial Jobless Claims edged higher to 197K from 196K previously but came in below market expectations of 201K.
Cleveland Fed President Beth Hammack reinforced the focus on inflation, saying, “Price stability is the responsibility of central banks.” She noted that “supply shocks are a notable challenge for Fed policy right now” and warned that “the longer inflation remains high, the harder it is to bring it back to target.”
The hawkish repricing, combined with higher inflation expectations linked to elevated Oil prices, has pushed US Treasury yields to multi-year highs. The benchmark 10-year yield trades around 5.10%, after hitting 5.15%, its highest level since 2007. Elevated yields support the US Dollar by increasing the appeal of US-denominated assets.
Across the Atlantic, stronger-than-expected German Ifo data released earlier on Thursday lends some support to the Euro (EUR), but broad US Dollar strength keeps the currency under pressure even as markets expect additional European Central Bank (ECB) rate hikes.
ECB Policymaker Dimitar Radev said the central bank should give its previous decisions time to work and stressed that the latest rate increase “doesn’t put us on a predetermined path.” He added that policymakers are “not seeing broad-based second-round effects,” although inflation risks are tilted to the upside and growth risks to the downside.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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