EUR/USD : Benefiting from ECB’s Hawkish Stance, Dovish Fed Outlook

Highlights

• Euro benefits from ECB’s hawkish stance as US inflation falters.
• Fed rate hike plans uncertain as Euro reaches one-year high.
• ECB continues raising rates as US inflation falls, benefiting Euro.

Overview

On Friday, the Euro was trading close to a one-year high of $1.1075 against the U.S. Dollar. This surge was due to the unexpected decline in U.S. producer prices in March, which boosted expectations that the Federal Reserve’s rate hiking cycle is coming to an end.

At 10:00 GMT, the EUR/USD is trading 1.1064, up 0.0017 or +0.15%. On Thursday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $101.98, up $0.57 or +0.56%.

Fed’s Rate Hike Plans in Question amid Weaker Inflation

Last month, the producer price index (PPI) for final demand dropped 0.5%, causing the PPI to increase by 2.7% in the 12 months through March. This was the smallest year-on-year increase since January 2021, following a 4.9% increase in February.

Additionally, on Wednesday, the consumer price index (CPI) inflation data for March came in at 5% year-on-year, down from 6% in February. However, core inflation, which excludes volatile food and energy prices, increased to 5.6% from 5.5% the previous month.

On Thursday, there was further evidence of the loosening of labor market conditions as the number of Americans filing new claims for unemployment benefits increased more than expected. This was a sign that higher borrowing costs were dampening demand in the economy.

The Fed funds futures traders are anticipating that the Fed’s benchmark rate will peak at 5.01% in June, up from 4.830% now, before falling back to 4.34% in December.

ECB’s Hawkish Stance Boosting Euro

The European Central Bank’s relatively more hawkish stance in tackling inflation is boosting the single currency. Analyst Ben Laidler from eToro noted a significant swing in interest rate differentials in favor of the euro, as the ECB is expected to continue raising rates while the Fed may cut rates due to falling U.S. inflation and rising recession risks.

Two ECB policymakers expressed their views on the euro zone’s inflation and the need for continued rate hikes. Bostjan Vasle, an ECB Governing Council member, believes that the ECB needs to keep raising rates due to persistently high underlying inflation. He also suggests that the next move will likely be a 25 or 50 basis point increase.

Meanwhile, ECB policymaker Joachim Nagel believes that core inflation rates in the euro zone will improve in the coming months. However, Nagel acknowledges that the ECB still has more work to do with its monetary policy. Overall, both policymakers emphasize the importance of closely monitoring inflation and adjusting monetary policy accordingly.