Currencies 2 MIN READ

Fed, ECB divergence should limit EUR/USD pull backs

January 23, 2023By Reuters

Jan 23 (Reuters) – EUR/USD struck a 9-month high on Monday before reversing lower with help from rising US rates and a buoyant dollar, but pull backs such as these are likely to be opportunities for bulls, supported by diverging Fed and ECB policy paths.

CFTC data indicate investors expect short-term US rates to decrease nL8N3470HM, which would lead to a steepening of the US 3-month/10-year spread.

Eurodollar and fed funds futures continue to price in Fed rate cuts in either Q3 or Q4 2023.

A Reuters poll indicates economists expect the ECB to hike 50bps at its next two meetings with hikes ending when the deposit rate reaches 3.25% in Q2 2023.

Euribor futures mirror the poll results but then price rate cuts in either Q3 2023 or Q1 2024.

Eurodollar and Euribor investors are pricing in much more aggressive rate cuts for the Fed than the ECB, which should help erode the dollar’s yield advantage over the euro and underpin EUR/USD.

Bullish technicals reinforce the rate influences and as long as current investor sentiment regarding central bank policies holds EUR/USD could rally.

(Christopher Romano is a Reuters market analyst. The views expressed are his own.)


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