Euro weakens against US Dollar as hawkish Fed bets hog limelight
- EUR/USD declines to near 1.1444 due to US Dollar’s continued outperformance.
- The Fed is expected to deliver at least two interest rate hikes this year.
- Investors await the Eurozone-US flash PMI data for June and the US PCE Inflation data for May.
The Euro (EUR) trades 0.23% lower against the US Dollar (USD) at around 1.1444 during the European trading session on Monday. The EUR/USD pair faces selling pressure as the US Dollar (USD) continues outperformance amid intensified expectations that the Federal Reserve (Fed) will deliver at least two interest rate hikes this year.
At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is up 0.25% to near 101.00.
Hawkish Fed bets have increased further after Wednesday’s monetary policy announcement, in which nine out of 19 policymakers supported the need to hike interest rates this year. This is a sharp turnaround as none of the Federal Open Market Committee (FOMC) officials called the need to tighten monetary conditions this year in the March policy meeting.
The Fed’s dot plot, which reflects where policymakers see interest rates heading in the near-to-long term, showed that the Federal Fund Rate will rise to 3.6% by the year-end from 3.1% previously anticipated.
According to the CME FedWatch tool, the odds of the Fed delivering at least two interest rate hikes this year is 58.5%, a significant acceleration from 17.1% seen a week ago.
For more cues on the US interest rate outlook, investors will focus on the Personal Consumption Expenditure Price Index (PCE) data for May, which will be released on Thursday.
In the Eurozone, investors await the preliminary HCOB Composite Purchasing Managers’ Index (PMI) data for June, which will be released on Tuesday.
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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