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The Euro to Dollar exchange rate has seen its uptrend stall amidst increased investor nerves ahead of next week's ECB and Federal Reserve decisions says Charalampos Pissouros, Senior Investment Analyst at XM.com.
The dollar continued to trade higher against most of the other major currencies on Wednesday, perhaps as traders further liquidated short positions after last week’s tumble due to the larger-than-expected slowdown in consumer and producer prices for June.
Nonetheless, in the absence of top-tier data on yesterday’s agenda, the market’s perception of where the Fed may be headed has not changed and that’s maybe why the greenback was sold again this morning.
Investors continue to expect only one more hike by the Fed and a series of rate reductions throughout 2024.
The dollar’s fate now lies in the hands of Fed officials, who are meeting next week to decide on interest rates.
Although a 25bps hike is nearly fully priced in, for the currency to stage a meaningful recovery, policymakers may need to find a way to convince market participants that this may not be the last time they push the hike button and that no rate cuts are on their agenda for 2024.
Those trading the dollar against the euro will likely have a much more difficult time deciding how to act, as apart from the Fed, they will also have to evaluate the outcome of the ECB decision.
Governing council member Yiannis Stournaras was the latest member to join the chorus of policymakers pushing against a September hike, saying that only one more quarter-point hike should be enough.
His rhetoric follows a softening of tone by his colleagues Knot and Nagel and although it hasn’t hurt expectations of two more hikes this year much, it convinced the markets that interest rates should be around 20bps below current levels by the end of 2024.
Thus, President Lagarde’s post-decision press conference may attract special attention as investors will be eager to find out whether she has also softened her stance or whether she will appear in her hawkish suit again, dismissing the Eurozone’s economic slowdown and prioritizing getting inflation in check.
Above: EURUSD is looking indecisive at these levels.
The pound was the main loser yesterday, suffering on the back of the lower-than-expected UK inflation data.
Traders continued slashing their BoE hike bets throughout the whole day, and they now see a quarter-point hike as a better choice for the upcoming gathering, assigning to it a 70% probability, with a double hike now getting 30%.
What’s more, they now see only around 85bps worth of hikes from current levels compared to nearly 100bps just after the data was out.
The yen came under pressure as well perhaps as traders continued scaling back their bets of a policy shift by the BoJ at next week’s gathering after BoJ Governor Ueda said that there was still some distance to achieve the 2% inflation target sustainably and stably.
Even if the Bank does not act, investors may be interested in the new inflation projections as they may try to estimate the length of the distance Ueda is referring to.
The aussie was this morning’s best performer after Australia’s better-than-expected employment report for June increased the probability for another hike at the RBA’s August meeting.
Investors are now evenly split on whether the Bank should hike or not.