Dollar case weakens as ECB toughens tone
Longer term, the outlook for EUR/USD remains bearish, but the case for the dollar is weakening with the ECB’s increasingly hawkish tone.
The recent change in the ECB’s attitude with regard to inflation has had the effect of fueling expectations of key rate hikes by market operators, and consequently of narrowing the rate differentials between the two economic regions.
Moreover, operators have already anticipated a considerable number of Fed rate hikes over the next two years. Those of the ECB are also important, but could be much more so given that inflation is likely to be more persistent in the euro zone than in the United States due to the greater exposure of the euro zone to the war in Ukraine and the later tightening of ECB monetary policy.
The scenario that now seems most likely over the next few months is a consolidation between the recent low and the symbolic threshold at $1.10, unless the inflationary situation in the United States worsens further. In this case, the Fed would have no choice but to opt for massive rate hikes, of 75 or even 100 basis points per meeting, which would kill the equity markets, the bond markets and the major currencies. The dollar would be the main beneficiary of such a situation.
Ultimately, it is the inflation figures on both sides of the Atlantic that will dictate the pace of central bank rate hikes and therefore have the greatest influence on the EUR/USD exchange rate.