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Dec 05 - 10:55 PM

EUR/USD - COMMENT-Potential EUR/USD Reversal On Central Bank Outlooks

By Andrew M Spencer  —  Dec 05 - 09:00 PM

EUR/USD yield differentials are likely to remain unchanged after next week's central bank meetings, with the Fed and ECB both set to raise rates by 50 basis points. Contrasting policy outlooks may however trigger a return to USD strength.

The Click here prices a 77% chance of a 50 bps Federal Reserve rate hike to 4.25%-4.50% on Dec 14. Fed Chair Jerome Powellbelieves a "soft or softish" landing remains possible for the U.S. economy, with inflation easing and no dramatic rise in unemployment.
Economists suggest a 60% chance of a shallow U.S. recession in 2023.

The European Central Bank is expected to raise rates by 50 bps on Dec 15, with 0#ECBWATCH pricing a move to 2% at 89%. ECB President Christine Lagarde said euro zone inflation has not peaked and risks turning out even higher than currently expected, with ECB economists highlighting "upside" risks.
EZ inflation hit 10.6% in November and economists expect a mild recession in Q4 2022 and Q1 2023.

Given the disparate state of the U.S. and EZ economies, it would be reasonable to assume that Powell will be more upbeat than Lagarde.

Technically daily EUR/USD charts are positive with 5, 10 and 21-day moving averages heading north.
EUR/USD trades around 1.0511, 50% of the 2022 fall, which is an ideal level for a change in trend.

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Refinitiv IFR Research/Market Commentary


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