Euro remains capped below 1.1525 weighed by post-Fed US Dollar strength
- EUR/USD pulls back to the 1.1500 area after a failure to extend gains past 1.1525.
- The Dollar holds gains following a hawkish hold by the Fed on Wednesday.
- The IFO Institute anticipates weak growth and above-target inflation for Germany.
The Euro (EUR) is trading practically flat against the US Dollar (USD) on Thursday, changing hands at 1.1504 at the time of writing, after failing to find acceptance above 1.1525. A hawkish hold by the Federal Reserve (Fed) provided a fresh boost to the USD on Wednesday, triggering a sharp reversal for the EUR/USD pair, which retraced in one session, all gains from the previous seven trading days.
The Fed left its benchmark rate in the 3.50%-3.75% range, in the first meeting chaired by Kevin Warsh, but the new central bank chief cleared any doubts about his commitment to bring inflation to the 2% target. The bank also removed references to an easing bias in a shortened monetary policy statement.
Fed officials acknowledged an improvement in economic activity and a stronger labour market, despite the uncertainty stemming from the Middle East conflict. In this context, nearly half of the committee members anticipate a rate hike before the year's end, according to the bank’s “Dot Plot”, which did not include Warsh’s forecasts. US Treasury yields jumped after the event, and the US Dollar appreciated against its main peers.
In the Eurozone, the German IFO institute confirmed the outlook of strong inflation and sluggish growth for the region’s major economy, adding pressure on the Euro. IFO forecasts show that German inflation is expected to average 2.9% this year and 2.7% in 2027, while the economy is seen growing 0.8% this year, unchanged from previous estimations, and another 0.8% in 2027, this one revised down 1.2%.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
