The Euro may be ready to move higher vs the US Dollar, with the possible trigger tonight’s Federal Open Market Committee (FOMC) policy decision. The US central bank is expected to hold rates steady, although there is an outside chance of a 25-basis point rate hike. According to Fed funds futures, that chance is right around 5.6 percent. On the outside chance that the Fed does initiate a rate liftoff – the first since the Covid pandemic began back in early 2020 – it would likely boost the US Dollar and send EUR/USD lower.
Nevertheless, if the Federal Reserve meeting comes and goes as expected, EUR/USD would likely rise. That is because traders have largely baked in much firmer expectations for a March rate hike. Sustained inflation amid a surprisingly strong but still recovering labor market has forced the Fed onto the path of normalizing policy. The chance for a 25 basis point rate hike in March has gone from 53.6% to 88.2% over the past month.
That has pushed Treasury yields higher across the curve, but short-term 2- and 5-year rates have outpaced longer-dated yields. The US Dollar is particularly sensitive to those shorter-term rates. The hawkish repricing around the increasing Fed rate hike bets has been the primary factor pushing the EUR/USD exchange rate lower. For reference, short-dated European government bond yields are down since the start of the year.
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