Morning Brief – US rate cuts

US rate cuts 

Much of the momentum for EURUSD trading above 1.10 only a few weeks ago was built upon expectations of rate cuts by year end at the Federal Reserve. Whilst constantly changing, that view is under threat currently, with markets pricing stickier rate expectations than they previously had been. The Fed is still widely expected to take a temporary pause in its rate hiking cycle this month. However, markets are currently pricing a further 25-basis point hike before August. Whilst it is debatable at best whether this remaining upward adjustment to interest rates will ever be delivered, the message of more enduring and higher US rates has definitely stuck. 

One financial element that has been driving the recovery of the Dollar recently has been the pricing out of rate cuts by year end. For much if not all of the first quarter of this year, at least one interest rate cut had been fully priced in by the end of 2023. Today, there is no sign of rates easing from the 5-5.25% level by year end. The message of higher rates for longer appears to have finally stuck, at least with respect to the US economy, and has been driving the greenback higher as a result. 

As we heard from Christine Lagarde yesterday, the ECB is committed to raising rates in order to stem inflation. EURUSD had been able to weaken based upon weaker growth and inflation statistics being observed within Eurozone economies and for the bloc as a whole in recent trading sessions. The President’s reassurances yesterday were able to drive EURUSD up by around half a cent, however, did not so far deliver a more meaningful and credible correction higher. The market is clearly questioning its conviction behind US rates subsiding in favour of Eurozone rates and EURUSD is paying the price. 

Discussion and Analysis by Charles Porter

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