The EUR/USD has come under pressure on Wednesday as traders await the release of the Federal Open Market Committee (FOMC) minutes later on today, and HCOB PMI data from the Eurozone and Germany due out on Thursday.
The USD was up due to improved US bond yields. On the other hand, the euro was under pressure as the market remained cautious amidst diminished expectations for early interest rate cuts. However, given the close trade ties between China and the Eurozone, the single currency may strengthen following China’s decision to lower its five-year Loan Prime Rate (LPR) by 25 basis points (bps) to support its economy. Scheduled for release on Thursday is the HCOB Purchasing Managers Index (PMI) data from the Eurozone and Germany, which will draw attention among traders.
Eurozone economy and inflation
Economists at ING have noted that today’s release of the Eurozone consumer confidence data for February may show an improvement, despite challenges, since there are hopeful signs the Eurozone economy is growing. Wage growth has beaten inflation, and this will potentially result in a boost from an increase in real incomes.
In the upcoming months inflation may fall according to economists at Deutsche Bundesbank. The earlier timing of Easter this year may influence the prices of package holidays and affect the inflation rate. The German Buba Monthly Report has shown that inflation for food and other goods will possibly drop further in the coming months. But price pressures in the services sector are forecast to decline at a slower pace, due to the persistent strength in wage growth.
FOMC minutes
All eyes will be on the FOMC minutes later today and investors will be closely watching the release to gain further insights into the Fed’s position on interest rates.
The US Federal Reserve is expected to maintain its high policy rates for an extended period to manage stubborn inflationary pressures, particularly after the release of last week’s strong consumer and producer prices from the US.
The USD may continue strengthening if the minutes have a hawkish tone and the committee highlights a cautious approach for the year ahead.
Fed rate cuts
The recent shift between market and Fed expectations over the timing and pace of monetary easing this year has led markets to push back their expectations around the timing of the first rate cut from March to June. According to the CME FedWatch Tool, the likelihood of a Fed rate cut has significantly diminished to 8.5% for March and 30.7% for May. Market sentiment is now shifting towards easing starting in June, with a possibility of 54.3%.
The current prediction of four 25bp cuts contradicts recent Chair of the Federal Reserve Jerome Powell’s comments who has called for two or three rate cuts. The Federal Reserve’s dot plot for this year suggests an expectation of 75 basis points in rate cuts, while the Fed funds futures market is pricing in 89 basis points in interest rate cuts.
The multinational banking and financial services company, Australia and New Zealand Banking Group (ANZ) forecasts that the Federal Reserve (Fed) will start cutting rates from July 2024.