The most important trading week in June started with slow price action as investors wait the events ahead – US inflation, the Federal Reserve, European Central Bank, and Bank of Japan’s decisions.
But one should not be fooled and think the markets will not move this week. They will, and they will move big.
Out of all the events scheduled this week, the number one in terms of implications for financial markets is the Federal Reserve of the United States’ decision. The base case is that it will refrain from hiking the funds rate, but it is a tough call.
Regardless of what its decision would be, the dollar will move. And so, financial markets volatility will increase exponentially.
EUR/USD – 1.0850 or 1.0550 24h after the Fed?
Trading is a game of speculation – of probabilities. One cannot say that the dollar will tank if the Fed holds the funds rate steady.
It all depends on the text (i.e., message) that accompanies the decision. For instance, the Fed might deliver a hawkish pause by saying that future increases may be appropriate. In this case, ING sees the EUR/USD at 1.07 24h later.
But the Fed might surprise and deliver a 25bp rate hike and signal further rate increases as appropriate. Under this scenario, ING sees the EUR/USD to 1.0550.
Finally, the Fed may pause and be dovish, with ING expecting the EUR/USD to move to 1.0850 in 24h.
So it is a close call.
And it all depends on what the inflation report will show tomorrow.
According to the ISM services late data, inflation should come down sharply. Yet, the market is not moving in the sense that the EUR/USD trades around the same levels it did a month ago.
My point here is that the Fed might end up being hawkish or dovish without changing the funds rate level. Out of the two, the bias is that the Fed will try to compensate for not hiking with a bit more of a hawkish tone.
Therefore, the risk is that the EUR/USD will make a new 2023 low rather than squeezing higher.
Regardless of what the exchange rate will do, one should keep in mind that only one day later will be the ECB’s turn to decide on rates. And a rate hike is very likely; hence, any EUR/USD move following the Fed’s decision should be taken with a grain of salt.
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