This week, both the Federal Reserve and the European Central Bank (ECB) will announce their latest interest rate decisions. A hawkish hold from the Fed and a dovish cut from the ECB could see the US dollar surge and the euro slump.
At the time of writing, the US dollar is recouping some of last week’s losses. GBP/USD is retreating from the 20-day high hit on Monday and EUR/USD has pulled back from a near six-week high. Meanwhile, GBP/EUR is trading around an 18-day high.
What are the Fed and the ECB expected to do?
The Federal Reserve is expected to leave interest rates on hold at 4.5% when it announces its decision on Wednesday evening.
The US central bank could also signal that monetary policy must remain restrictive, potentially putting the Fed on a collision course with US President Donald Trump, who said he will ‘demand that interest rates drop immediately’.
In contrast, the ECB is likely to cut interest rates again by 25bps on Thursday. The European Central Bank could also indicate that more policy easing is expected in the months ahead.
How could this impact USD and EUR?
A hawkish hold from the Fed could revive the US dollar, allowing it to recover last week’s losses and reapproach the highs hit in mid-January. Meanwhile, a dovish cut from the ECB could send the euro tumbling.
However, if Fed Chair Jerome Powell defies Trump by saying that interest rates may remain higher for longer, any backlash from the US President could cause volatility.
Thursday also brings the first estimates for Eurozone and US GDP growth in the fourth quarter. Anaemic growth in the Eurozone could further fuel EUR’s losses. In the US, GDP is expected to slow slightly but remain at a decent 2.8%. This could support the ‘greenback’.
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