EUR/USD near 9-month high as EBC and Fed diverge on rate expectations

[MongiIG]

Just as markets begin to price in the first Fed rate cut, more ECB members have come out with forecasts that eurozone rates will rise for at least the next two meetings. This is pushing the euro up against the dollar.

 Jeremy Naylor | Writer, London | Publication date: Monday 23 January 2023

EUR/USD at nine-month high

The euro now trades at a near nine-month high against the US dollar.

There is a lot going on around this particular cross and indeed the dollar and the euro particularly. Yesterday, ECB Governing Council member Klaas Knot said in an interview that we should expect a 50-basis point (bp) increase in European Central Bank (ECB) interest rates at the next meeting, adding that more steps would follow in May and June.

This confirms what we heard from the Bank of France Governor, Francois Villeroy de Galhau, who was saying that Christine Lagarde's expectation of 50-basis point guidance, was still very much valid.

EUR/USD

I want to show you what's going on, on the foreign exchange markets. This is the push high that we've seen for the euro against the US dollar. And you can see at these levels now looking at the period we've not seen since intraday back on the 21st of April last year, if we move up much higher still within back to the beginning of April last year at 10899 flirting with that 109 level. 110 is the next target to watch out for, which would take us back to those levels not seen since the beginning of April last year.

So money very much going into the euro, but it's also going into other currencies as well.

GBP/USD

Just want to quickly show you what's happening with sterling against the US dollar. We got this move up at 12446 just to that area of resistance.

Now, these hawkish comments contrast with market pricing for less aggressive Federal Reserve, which explains the recent euro rally against the dollar.

According to Refinitiv, the market has priced out almost any chance of a 50 basis point hike by the Fed at its next meeting early February and after peaking by mid-2023, investors bet on a 50-basis point cut from the Fed for the second half of the year, reflecting softer data on inflation, consumer spending and housing.

A quick note on the US housing market. On Friday, existing home sales fell to their lowest since 2010 and in 2022, existing home sales fell by 17.8%. That was the most since 2008. So lots going on in the foreign exchange markets at the moment for central banks.