Currency of the Week : EUR/USD

Trading Discussion Currencies
1

With both FOMC and Core PCE affecting the USD this week, the EUR and GBP are also being affected by the European Union CPI. EUR/USD being the most traded pair globally, it naturally takes priority this week.

Expectation for the FOMC meeting today and tomorrow, is that the Committee will raise rates by 75bps, bringing the Fed Funds rates from 1.75% to 2.50%. Based on the PMI data that was released on Friday, we know the following: The Manufacturing component was 52.3 this month, compared to the 52.7 last month. The Services PMI was only 47 compared to the 52.7 in June. With this, the Composite reading was brought down to 47.5 from 52.7 in June. This was well below the expansion/contraction level of 50, showing that manufacturing was slowing (contractionary).

On the other hand, ECB hike rates last week to bring the key interest rate from -0.50% to 0.00%. This was the first rate hike in 11 years. Poor PMI data in the Eurozone was released last week showing that manufacturing is slowing. Readings were also below the 50 level. To compare, the Manufacturing PMI in the Eurozone was 49.6 this month compared to the 52.1 in June. Whereas, the Services PMI was 50.6 compared to the 53 in June, bringing the Composite number down to 49.4 from 52 in June.

It will be interesting to see how this will affect the EUR/USD along with two of the biggest global economies in the coming weeks. In volatile times such as this, it is important to remember that all trading carries risk.

2 Likes
2

What are the odds of an interest rate increase in the US followed by a rate drop later in the year? Any thoughts on that?

3

Last paragraph:

If the Fed surprises, or is more hawkish than expected, the pair could break back below parity. However, if the Fed is concerned about the state of the economy or a potential recession, EUR/USD could be back above 1.0340 in a hurry!

If the Fed surprises and does what? Bigger rate hike?

4

This is an interesting question. The market is expecting another 75bps rate hike on Wednesday, but the Federal Reserve’s action for the rest of the year will likely come down to how the inflation situation develops, as well as the state of the US economy.

Economic data over the coming months is likely to provide traders with a deeper insight into what to expect, and Chair Powell’s press conference after tomorrow’s meeting could also potentially help gauge in which direction the central bank is be headed.

5

Yes. Expectations are mostly for another 75bps hike, but after another record-high US CPI print for June, there is a chance that the Fed could opt for a more aggressive 100bps move.

Of course, all trading carries risk, but a hawkish surprise along these lines could potentially support the greenback higher.