Monex Europe: ECB and Fed to hit terminal rates without officially announcing it

Monex Europe: ECB and Fed to hit terminal rates without officially announcing it

24 juli 2023

Monetair beleid ECB Fed
Rente (04) inflatie

Simon Harvey, Head of FX Analysis at Monex Europe, has shared his expectations for this week’s ECB and Fed rate decisions. 

Slowing growth conditions could see the ECB hit terminal at 3.75%. While we expect this to be the terminal level of rates in the eurozone, we believe it isn’t in the ECB’s best interest to officially announce this just yet. Doing so would prompt a premature loosening in financial conditions that could ultimately lead to further rate hikes being required.

Given the right mix, EURUSD could head back below 1.10. With US growth data and a Fed decision also due next week, data showing the

US economy once again outperforming the eurozone and a greater likelihood that the Fed will conduct a further rate hike compared to the ECB will likely send EURUSD back below the 1.10 handle.

Fed to hit a terminal level of 5.25-5.5%. This view has recently been confirmed by the improvements in labour market and inflation data, the latter proving so constructive it begs the question if further tightening is even needed to begin with. While we expect this week’s rate hike to be the last of the cycle, we don’t anticipate that the Fed will officially acknowledge this, with Chair Powell instead stressing the upside risks to inflation based upon growth resiliency and limited slack within the labour market.

Rate cutting to start as early as March 2024. If our expectation for a rate hike next week is confirmed, then markets anticipate that cutting could start as early March 2024. A slowdown in growth early next year should allow the Fed to begin easing policy, as the lagged impact of policy continues to bite. With the Fed likely to ease first, we expect a reversal of last year’s dynamics, with a dollar selloff ensuing before other G10 central banks are left to play catch up once again.

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