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Euro-Dollar Rebound Needs a Hawkish Lagarde for Sustenance: XM.com
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Euro-Dollar Rebound Needs a Hawkish Lagarde for Sustenance: XM.com
Mar 22, 2024 2:18 AM

Written by Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this article can be found here.

Euro-dollar rebounded from near the key zone of 1.1010, with traders now awaiting today’s ECB decision.

A 25bps hike is also widely expected and well-telegraphed by this Bank, but just last week, some officials pushed back a September hike.

Combined with Monday's PMIs which revealed a sharp slowdown in business activity, this prompted investors to reevaluate their view regarding the ECB’s future course of action.

They are still anticipating nearly another 25bps hike to be delivered by December, but they have added to their rate cut bets, now expecting interest rates to end next year around 20bps below current levels.

Therefore, the spotlight is likely to turn to President Lagarde's press conference as traders will likely want to find out whether she will also push back on another hike or whether she will appear hawkish again, dismissing the economic slowdown in the Euro area and prioritising bringing inflation to heel.

The US dollar traded lower against the majority of the other major currencies on Wednesday and continued sliding during the Asian session today.

Responsible for the dollar’s wounds was Fed Chair Powell, who at the press conference following yesterday’s decision, did not appear hawkish enough to convince the bulls to jump into the action.

As was broadly expected, the Committee raised interest rates by 25bps to its highest level in 22 years, with the statement accompanying the decision nearly identical to the prior one, thereby leaving the door open to more action if needed.

At the press conference, Chair Powell said that the central bank will make decisions meeting by meeting, closely watching economic data, adding that they could hike again in September if the data suggests so, but also that they could choose to hold steady.

Regarding rate cuts, he said that they will not happen this year, refraining from closing the door to any reductions in 2024, adding that this is a judgment they must make then.

His comments kept investors split on whether another hike should be delivered, despite June's dot plot suggesting so, while encouraging them to add to their rate cut bets for next year as his choice to put the probability of cuts on the table indicates a softening stance compared to prior appearances where he said that any rate cuts are ‘a couple of year out.’

Early on Friday, the central bank torch will be passed to the BoJ.

Speculation for an imminent policy shift has subsided recently as just last week, Governor Ueda reiterated his remarks that there is still some distance to go before achieving their inflation objective sustainably and stably.

That said, given the Bank’s track record of surprising the markets, a policy tweak cannot be totally ruled out.

Even if the Bank does not act at this gathering, a decent upside revision of its inflation forecasts may add to speculation for a normalization step at the next meeting, which could still prove positive for the yen.

The opposite may be true if Ueda and his colleagues place more emphasis on maintaining current policy due to inflation being mainly driven by higher import costs rather than domestic demand.

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