EUR/USD gives back early gains as US Dollar rebounds, Fed-ECB policy eyed
- EUR/USD gives back a majority of its early gains as the US Dollar bounces back.
- Both the Fed and the ECB are expected to leave interest rates unchanged this week.
- Higher oil prices have prompted inflation expectations across the world.
The EUR/USD pair surrenders a majority of its early gains and trades marginally higher at around 1.1430 during European trading hours on Monday. The major currency pair falls back as the US Dollar (USD) recovers half of its early losses.
At the time of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, 0.15% lower to near 100.35. Still, the DXY is close to its over nine-month high of 100.54 posted on Friday.
The US Dollar trades broadly firm amid higher oil prices and a risk-off market sentiment due to conflicts between the United States (US), Israel, and Iran.
Meanwhile, investors await monetary policy announcements by the Federal Reserve (Fed) and the European Central Bank, which are scheduled for Wednesday and Thursday, respectively. Both central banks are expected to leave interest rates unchanged.
The Fed is anticipated to hold interest rates steady as the Strait of Hormuz-led spike in the oil price has de-anchored inflation expectations. In the policy meeting, investors will also look for cues regarding how long the Fed will maintain a status quo. According to the CME FedWatch tool, the Fed will hold interest rates steady in another four policy meetings.
Meanwhile, the ECB is expected to continue holding interest rates steady as price pressures have remained close to the 2% target for a longer period.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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