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Feb 22 - 11:55 AM

EUR/USD - COMMENT-EUR/USD Should Sink If Fed, ECB Are Higher For Longer

By Christopher Romano  —  Feb 22 - 09:35 AM

EUR/USD traded to a three-session low Wednesday on the back of broad-based U.S. dollar buying ahead of Fed minutes.
The pair's descent is likely to extend as risk from the Fed and ECB taking on a higher-for-longer policy stance increases.

Investors are bracing for rate increases from both the Fed and ECB to persist, and possibly be held at higher levels longer than expected, as prospects for economic growth build nL8N351307.

Although the potential for robust economic growth will likely drive the ECB and Fed to hike further, the dollar should benefit more than the euro.

Interest rate markets indicate the dollar's yield advantage over the euro should remain significant.
This is particularly evident in Eurodollar and Euribor futures which imply U.S. rates EDZ25 will remain higher than euro zone rates FEIZ5 for the foreseeable future.

2-year yield spreads US2DE2=RR also indicate the dollar holds a significant advantage over the euro and that advantage is poised to increase.

Should January PCE USPCE2=ECI top estimates, the higher for longer scenario for the Fed will be reinforced, which should serve to bolster the dollar's yield advantage.

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Refinitiv IFR Research/Market Commentary


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