EUR/USD: all eyes on the Fed today – Danske Bank

Chief Analyst at Danske Bank Jakob Christensen assesses the upcoming FOMC gathering and prospects for EUR/USD.

Key Quotes

“EUR/USD went in a slide back below 1.23 yesterday ahead of today’s FOMC meeting. With the Fed likely to dismiss the option of four hikes this year but possibly upping rate expectations for 2019, a March hike is unlikely to steer a new direction for USD, in our view”.

“Besides focus on the FOMC ‘dots’ capturing the pace and level of tightening ahead, the market will also keep an eye out for comments at the press conference regarding the recent sharp increase in 3M USD LIBOR-OIS – seemingly brought about by tighter USD liquidity – and whether it is something the Fed will consider responding to”.

“This takes some pressure off the Fed to hike but does it matter for USD crosses? A look into a slightly amended version of our Short-Term Financial Model (STFM) for EUR/USD hints that the coefficient of the short-term rate spread remains insignificant; thus, developments in USD liquidity and/or the Fed hiking pace should leave the cross relatively unscathed. Rather, it seems that what is dominating EUR/USD moves at the moment is long-term yields (USD positive recently) and relative inflation expectations (EUR positive since late 2017)”.