The EUR/USD pair recorded a goodish bounce for its second consecutive week to tap the 1.0765 top after touching a multi-year low of 1.0348 on May 13. A weak dollar was responsible for this bullish rally recorded by the euro as the USD tumbled despite lingering risk aversion sentiment.
However, investors have exhibited caution in their activities as macroeconomic data highlighted slow economic growth and worsening inflation, as recession becomes a more likely possibility in the global picture. Amid all these, Wall Street secured a decent recovery, as top indexes posted significant gains, halting a six-week losing streak.
Additionally, weak US data and a less aggressive-than-anticipated US Federal Reserve played a significant role in the dollar’s decline and Wall Street’s rally. According to the recently published Fed Minutes for May, policymakers are set to maintain a 50 basis points (bps) rate hike every month while opening the door to switch from a neutral stance to more aggressive rates. However, the policymakers also noted that a tighter monetary stance could trigger instability in financial markets.
Fed officials noted that the apex bank would be “well-positioned later this year” to re-evaluate the effects of the current policy on inflation and act accordingly.
Money markets immediately priced in a pause in rate hikes in September, a possibility Atlanta Fed Chair Raphael Bostic alluded to before the release of the minutes. The swift market reaction was due to Bostic’s popularity as a hawkish Fed official, giving his comments more pull.
EUR/USD to Receive More Bounce from Hawkish ECB
The European Central Bank (ECB) maintained its stance on a rate hike at the beginning of Q3 after ending the ongoing Asset Purchase Programme. ECB President Christine Lagarde believes that her institution should be in a position to exit negative interest rates by the end of Q3. This means the ECB would announce at least two 25 bps rate hikes between July and September.
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