Euro weakens ahead of ECB rate decision
The euro received support on the international currency market FOREX after yesterday's meeting of the Federal Open Market Committee (FOMC) of the US Federal Reserve System. The American regulator kept the interest rate at 3.75–4% per annum, however, the comments of Fed Chairman Kevin Warsh did not give investors an unambiguous signal about further actions.
The decision generally met market expectations. At the same time, investors closely followed the assessments of the state of the American economy, inflation, and prospects for monetary policy.
What Warsh said and why this is important for the euro
Following the meeting, Warsh noted that the American economy demonstrates confident growth, and inflation still remains elevated. In his opinion, the current monetary policy already influences credit conditions, so the Fed needs to assess incoming data before making new decisions.
The head of the regulator also expressed confidence that inflation can be returned to the target level of 2% without excessive slowdown of economic growth and a sharp deterioration in the labor market situation.
At the same time, the Fed did not rule out further tightening of monetary policy. Two committee representatives advocated raising the rate by 0.25 percentage points already at the October meeting. This indicates persisting disagreements within the regulator regarding the fight against inflation.
How the currency market reacted
Initially, the dollar reacted restrainedly to the Fed's decision, but after Warsh's press conference it began to weaken. On Wednesday, October 28, the euro rate rose by about 0.32% – to 1.1160 dollars per euro. Thus, investors perceived the speech of the head of the American regulator as not tough enough for further confident strengthening of the dollar.
However, on Thursday morning, October 29, the situation changed: the euro fell in price by about 0.15%, to 1.1134 dollars. The market continues to assess the prospects of American monetary policy, and the probability of a Fed rate hike in December remains high – about 78%.
What to expect from the euro next
In the coming days, the dynamics of EUR/USD will depend primarily on new data on inflation and the state of the American economy. If statistics confirm the resilience of economic growth and persistent inflationary pressure, the dollar may again receive support amid expectations of a rate hike in December.
At the same time, the lack of clear signals from Warsh about further tightening of Fed policy leaves the euro opportunities for recovery.
Additional investor attention will be focused on the meeting of the European Central Bank, whose rate decision is expected today, October 29. If the ECB's stance turns out to be less hawkish than the market expects, the euro may come under pressure. Conversely, unexpectedly hawkish comments from the European regulator may support the single currency.
The main conclusion: yesterday's Fed decision temporarily weakened the dollar and helped the euro recover, but it is still too early to talk about a sustainable reversal of EUR/USD. The prospects of the currency pair will be determined by the balance between inflationary risks in the US, expectations of an American rate hike, and further ECB decisions.
