Markets Believe In Rate Cuts Even After FOMC Statement

Federal Reserve Chair Jerome Powell was unable to convince markets of no rate cuts this year. As expected, the central bank delivered a 25bp rate hike but what mattered was the outlook after a most probable rate hike pause in June. Powell said that the FOMC does not support rate cuts but the markets didn’t believe the Fed’s comments. Instead, markets have priced in at least 3 rate cuts by December, a completely different forecast.

What is quite worrying is that such a near-term pivot would likely be a reaction to an increasingly worsening economic outlook. The U.S. dollar continued to weaken against the euro and pound.

The further outlook for the dollar remains bearish since there was no hawkish surprise from the Fed which could have lifted the battered greenback.

EUR/USD: The euro flirted with the 1.11-resistance but an upper breakout is still outstanding. The next target is 1.12.

GBP/USD: The pound stabilized above 1.25 and is currently heading towards 1.26. We see a next hurdle around 1.2650 from where sterling may correct.

Today we will have the European Central Bank decision at 12:15 and 12:45 UTC. Markets expect a neutral/hawkish 25bp rate hike by the ECB with the promise of further rate increases in the months ahead provided that inflation remains high.

Thus, the euro’s outlook remains slightly bullish but if the EUR/USD is unable to overcome the 1.1110-barrier it may correct.

 

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