EUR/USD skyrockets as hawkish ECB overshadows the Fed's meeting impact on the dollar (Daily analysis 16.06.2023)

The FOMC paused the cycle, with committee members suggesting two additional interest rate rises through forecasts. Hopes that the hawkish tone of the Fed meeting would be enough to pull the dollar out of its negative trend were swiftly and brutally dashed. The ECB did not fail to weigh in either, resulting in an instant and violent resumption of the USD sell-off.

The Governing Council raised the cost of money at the eighth consecutive meeting and for the second time in a row by 25 bps. As a result, the deposit rate, which just a year ago was at - 50 basis points, was raised to 3.5%. It is practically a foregone conclusion that the move will be repeated next month and, as a result, will equal its highest level ever. Since December last year, the ECB has dethroned the Federal Reserve in the race to become the central bank that tightens monetary policy more decisively. It also forged such a reputation yesterday by announcing further increases, accelerating the pace of balance-sheet reduction (quantitative tightening, QT), but also revising forecasts.

Although expectations for economic growth have been lowered somewhat (GDP growth is expected to be 0.9% this year, accelerating to 1.5% next year), the new projections have raised the path of price index dynamics. This is especially true for the problematic and persistent core inflation, whose estimates for 2023 and 2024 both rise by as much as half a percentage point, to 5.1% and 3.0% y/y, respectively. In such circumstances, investors do not even think to question Christine Lagarde's words that the ECB still has room for hikes. A minimum of one move is assumed, and the state of the economy will condition the decision in September.

The meetings of the main central banks have not shaken the belief that restrictive monetary policy will be maintained much longer in the eurozone. The market is now pricing that a year from now interest rates in the US will be 40bp lower than they are now, while in the eurozone, they will still be at record highs. Wednesday's rise in the dollar from the lows was erased in an instant. The EUR/USD shot above 1.09, scored its strongest rise in two months and reached ceilings not seen since 11 May. Conotoxia's currency forecasts remain negative for the dollar. We expect the EUR/USD to settle above 1.10 in the second half of the year.