The Fed hikes six days after the ECB, weighing on the Euro
- EUR/USD breaks 1.1500 after the Fed decision, 58 pips off the day's high
- The ECB raised its own deposit rate a quarter-point to 2.50% six days ago
The European Central Bank (ECB) moved first. Six days ago it raised its deposit rate, the return banks earn on money parked with it, by a quarter-point to 2.50%. The Fed matched that size on Wednesday and went to 3.75-4.00%, its first increase since 2023. So both sides of this pair repriced inside a week. At the midpoint of its new range, the Fed pays 3.875% against the ECB's 2.50%, a distance of 1.375 points. Not one of the twelve voted against. The statement said nothing about the path. The forecasts released beside it carry the American rate to 4.1% by December and keep it there through 2027, which is one more increase and no reductions. The gap itself is exactly where it sat before either of them moved.
Thirty-one pips went in the decision bar alone, and the selling carried on after it. Another 16 have gone since, putting the pair just under 1.1500 at the low of the day and roughly 34 pips under where it traded before the release. The high just above 1.1550 dates from the European morning and is now 58 pips overhead, which is the whole of the session's range. Intraday momentum has not caught the move, reading 44 and mid-range, because the fall came in two steps with a pause between them.
EUR/USD 5-minute chart
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
Joshua Gibson
FXStreet
Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.
