The Euro is starting to show signs of weakness against the US dollar as we enter the European trading session as market participants keep an eye on developments regarding the Ukraine-Russia conflict while awaiting the latest interest rate decision and monetary statement from the US Federal Reserve.
A rate hike of 25 basis points is already priced into the EUR/USD currency pair so the focus will be on the following statement by US Federal Reserve President Jerome Powell about the future direction of the Fed and how many further rate rises should be expected.
The Ukraine-Russia conflict is expected to influence the Fed’s decision with regards to rate hikes but inflation, which is sitting at a 40-year high is set to be the deciding factor for the further tightening of monetary policy.
“We and consensus expect a 25bp hike, taking the target range of the fed funds rate to 0.25-0.50%. We expect a total of seven interest rate rises in the course of 2022, as upside risks to inflation outweigh the downside risks to growth stemming from the Russia-Ukraine conflict.” Said analysts from ABN Amro.
In another blow for the Euro, European Central Bank President Christine Lagarde spoke at the WELT Economic Summit yesterday and noted that the uncertainty surrounding the economic outlook had increased dramatically, and the conflict would reduce growth and create inflation due to increasing energy and commodities costs which led some to believe that a plan rate hike from the ECB later this year may now be put on hold.
As we can see on the chart, the EUR/USD has drifted off its highs of the day as the European session gets under way and it will probably remain here or drift slightly lower as the interest rate decision from the US Federal reserve approaches.
As mentioned earlier, a 25-basis point rate hike shouldn’t cause too much movement but a 50-point rate hike which some analysts have not ruled out will send the US dollar surging against all major currencies as will a better than expected bullish speech from fed President Powell
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