EUR/USD Edges Lower, ECB Expected to Raise Rates

05/04/2023

2 minutes read

2023.05.04 08:04

MarketPulse

ECB expected to raise rates by 25 bp
Federal Reserve hikes rates by 25 bp
Powell signals a pause in June

is trading quietly on Thursday, ahead of the ECB decision later today.

ECB expected to hike, but by how much?

All eyes are the ECB, which is expected to raise rates at today’s meeting. The burning question remains will the central bank increase rates by 25 or 50 basis points? The eurozone April inflation report, published Tuesday, didn’t provide any insights as both the headline and core readings barely moved and were very close to the estimates. Headline CPI came in at 7.0% and the core rate at 5.6%, which is well above the 2% target and much too high for the ECB.

The Bank has been aggressive in its rate-tightening cycle and raised rates by 50 bp in March. Another 50-bp increase would help in the fight against inflation but also raise the likelihood of a recession due to the economy slowing down too abruptly. The markets are leaning closer to a 25-bp hike (80% probability) over a 50-bp increase (20% probability).

The Federal Reserve raised rates by 25 bp on Wednesday, to the surprise of no one. Investors were more interested in what is coming next, and Jerome Powell did hint that this hike would be the final one after 10 straight rate hikes. The rate statement was somewhat dovish, with the Fed removing the phrase “some additional” rate hikes might be needed. It changed the language that said that it would examine various factors in “determining the extent” that further hikes would be needed.

Powell sounded more hawkish in the press conference, saying that higher interest rates had not sufficiently slowed down the economy, the labour market or inflation. Just to be crystal clear, Powell said that “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go”.

A rate cut, anyone? Powell said in his remarks that the inflation outlook does not support a rate cut. The markets disagree and have priced in an 81% rate cut in September (51% chance of 25-bp cut and 30% of 50-bp cut). Inflation is on its way down, but the pace of the deceleration could well determine if the Fed trims rates before the end of the year.

EUR/USD Daily Chart