Monex Europe: Fed to hold rates and ECB to increase by 25bp

Monex Europe: Fed to hold rates and ECB to increase by 25bp

June 12, 2023

Monetary policy ECB Fed
Geld dollar euro (03)

In the most recent Week Ahead forecast publication, Simon Harvey, Head of FX Analysis at Monex Europe, shares his expectations for this week’s Fed and ECB meeting.

Fed outlook

Given the lack of clarity in the macro-outlook, we don’t just expect the Fed to hold rates at next week’s meeting, but for their forward guidance to be slightly hawkish but largely non-committal.

The risks to our view are likely tilted to the downside, particularly if markets are unconvinced by the narrative that the Fed chooses to spin. With the data providing mixed messages communication is likely to be more of a challenge than usual. Confusing messages from the SEPs, or communication challenges in Chair Powell’s press conference, could lead to markets downgrading monetary policy expectations leading the dollar lower.

ECB outlook

Similarly to the Federal Reserve meeting, we expect no fireworks from the ECB rate decision itself and look for a 25bp increase in the deposit rate to 3.5%. Instead, the focus will largely rest on the updated staff projections and President Lagarde’s press conference. The latter is where we think there is greater scope for market volatility, especially after markets pushed back on the guidance provided in May.

As for the economic projections, we think 2023 growth will be downgraded slightly following weaker Q1 GDP data, while their headline and core inflation forecasts are likely to remain at 2.1% and 2.2% respectively for 2025.

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