The Bank of England and the Fed were expected to cut rates slightly less than the ECB. This changed after the US employment report at the beginning of August. The Fed’s expectations have decoupled from those of the Bank of England and caught up with those of the ECB. More interesting, however, is the further decoupling in recent weeks. The market now expects the Fed to do more than the ECB this year, i.e. to pursue a more ‘active’ monetary policy, as my boss would put it, Commerzbank FX analyst Michael Pfister notes.
EUR/USD probably won’t be able to remain higher in the long term
“Our economists anticipate roughly the same number of interest rate cuts as expected from the Fed, while the ECB is likely to cut significantly less. Accordingly, not only is the already priced-in difference in monetary policy to be expected, which has led EUR/USD to the 1.12 level, but the gap is likely to widen even further in the coming months.”
“This is also important because, as already mentioned, the underlying conditions differ significantly. In the US, we are seeing a stronger real economy and higher inflation expectations at the same time, while in the euro area the real economy is weakening and the market is expecting slight inflationary pressure at best.”
“The associated more dovish Fed monetary policy should ensure that EUR/USD rises further if our economists are right. In view of the significantly stronger US real economy, however, I have my doubts as to whether EUR/USD will be able to maintain the higher levels in the long term.”
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