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CURRENCY ANALYSIS

EUR – Euro

ECB and Fed meetings joint effect on the euro

ECB, Fed, Meetings, Joint Effect, Euro, Currency Analysis, fx trader, forex

The March ECB and Fed meetings generated a supportive joint effect on the euro (from EUR/USD 1.05 to 1.07), in contrast to the opposite effect reaped by the corresponding meetings in December, which had triggered a downward reaction (from EUR/USD 1.08 to 1.03). In that case, however, the ECB had announced the extension of its purchase programme, whereas the Fed had simultaneously hiked rates, indicating that three further rate increases were to come in 2017.

At its meeting of 9 March, on the other hand, the ECB remarked that “the risks surrounding the euro area growth outlook have become less pronounced”, implicitly showing openness to the possibility of the close of 2017 marking a monetary policy reversal. This means that – if the picture does not worsen back – the euro should start recovering, albeit at a slow and gradual pace. Less than a week later, at the FOMC meeting of 15 March, the Fed hiked rates as expected, but kept unchanged the forecast path of subsequent hikes, confirming the scenario outlined in December, limited to three hikes in total this year. This will compress the dollar’s upside margin in general, aiding a strengthening of the euro, in particular if the assumed ECB reversal effectively takes place.

DOLLAR IN GENERAL

Twenty-sixteen came to an end with the dollar on a sharp appreciation trend, boosted by expectations that Trump’s victory would imply the implementation of a markedly expansionary fiscal policy, and as a result, much stronger growth in the US and a faster upward path interest rates. On the other hand, 2017 began with a partial retreat of the dollar, which reflects the overall cooling of such expectations (Fig. A).

For what concerns fiscal policy in particular, the stimulus package will not be announced before the summer, with the joint implication that the positive effect on growth will not come this year (if not only to an irrelevant extent) but will only be visible starting from the next biennium, and that lacking indications on the size of the budget, the Fed will not be able to speed up monetary normalisation.

At its meeting of 15 March, the Fed did hike rates (from 0.50-0.75% to 0.75-1.00%) but left the expected path of subsequent increases unchanged, confirming the scenario already described in December, i.e. another two hikes this year and three the next. However, it reasserted that the path may change in funci0tno of the economic policies implemented by the Trump administration.

For what concerns 2017, the market has embraced the Fed’s scenario, with fed funds futures pricing in another two rate increases by the end of December (Fig. B). This, to the extent to which the Fed will “stick” to its plans, limits the dollar’s upside to within and not beyond the highs hit at the beginning of January, with a trend that will depend on how the next two hikes are distributed in the next three quarters.

In the near term, it should generally level off at the medium-low end of the range outlined this year, as new input capable of generating expectations for more than three rate hikes in 2017 is unlikely to come before the announcement of the budget, i.e. before the summer. It should then strengthen back in the run-up to the next rate increase, which if US data remain favourable, could come already in June rather than in September.

ECB, Fed, Meetings, Joint Effect, Euro, Currency Analysis, fx trader, forex fig-AECB, Fed, Meetings, Joint Effect, Euro, Currency Analysis, fx trader, forex fig-B

Source: Thomson Reuters-Datastream

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