The FOMC hiked the fed funds target range by 25 bps to 5.25-5.50%. The decision lifted EUR/USD close to 1.11. Economists at Danske Bank analyze the pair’s outlook.
Relative strength of the US economy to weigh on the EUR/USD
The Fed hiked rates by 25 bps to 5.25-5.50% as widely anticipated. We make no changes to our Fed call and still think this was the final hike of the cycle.
Powell’s tone was balanced, as he gave few new signals on the future rate outlook. Markets interpreted this slightly dovish, as the latest ‘dots’ from June were still clearly in favour of one more hike beyond July.
There were no surprises from the Fed, and hence it does not give us reason to change our FX view. We maintain our strategic case for a lower EUR/USD.
We expect the relative strength of the US economy to weigh on the EUR/USD in the coming months, and we continue to forecast the cross at 1.06/1.03 in 6/12M. Today, we expect a relatively muted market reaction on the back of the ECB meeting. If anything, EUR/USD could move lower if the ECB does not deliver any firm signs of a September hike.
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