Last week's meeting of the US Federal Reserve weakened the EURUSD. The Federal Reserve is moving much faster than market forecasts toward contractionary monetary policy (stop buying bonds and raising interest rates). The European Central Bank (ECB) has not yet announced its exit from expansionary monetary policy. The divergence between the monetary policy of the Federal Reserve and the European Central Bank is a major factor in weakening the EURUSD.
The Federal Reserve uses dot-plot reporting or member interest rate estimates to guide the market. The DotPlat report, released last week, showed two phases of interest rate hikes by the end of 2023. In contrast, the European Central Bank continues to pursue expansionary monetary policy, not only in terms of raising interest rates, but also in reducing bond purchases. Even a senior economist at the European Central Bank has stressed that it is too early to talk about stopping the central bank from buying bonds.
In the long run, the divergence between the monetary policy of the Federal Reserve and the European Central Bank is to the detriment of the EURUSD. Inflation data will be in the spotlight next week. If inflation grows faster than forecast, the Fed will pull out of expansionary monetary policy sooner than previously forecast. Relatively important economic data from the euro area will be released this week. The PMI, the German business climate and the Consumer and Investor Confidence Index could affect short-term fluctuations in the euro.
The Federal Reserve uses dot-plot reporting or member interest rate estimates to guide the market. The DotPlat report, released last week, showed two phases of interest rate hikes by the end of 2023. In contrast, the European Central Bank continues to pursue expansionary monetary policy, not only in terms of raising interest rates, but also in reducing bond purchases. Even a senior economist at the European Central Bank has stressed that it is too early to talk about stopping the central bank from buying bonds.
In the long run, the divergence between the monetary policy of the Federal Reserve and the European Central Bank is to the detriment of the EURUSD. Inflation data will be in the spotlight next week. If inflation grows faster than forecast, the Fed will pull out of expansionary monetary policy sooner than previously forecast. Relatively important economic data from the euro area will be released this week. The PMI, the German business climate and the Consumer and Investor Confidence Index could affect short-term fluctuations in the euro.