- Market pricing for one more rate hike before year end is still hovering around 70% probability.
- Risk of Catalonia declaring independence from Spain is higher after the referendum over the weekend.
- Technically, EUR/USD has reached short term support.
- The Dollar Index is also running up against short term resistance on the daily chart.
Reasons for a lower EUR
Having called for a lower EUR and with the short term targets met, what are the reasons that could lead to more weakness in the currency?
Underpriced Fed expectations
The dot plot from the previous Federal Reserve Board meeting on 20 September showed that most of the voters are still expecting one more rate hike before the end of 2017.
Janet Yellen, chair of the Board, last week warned that “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent” and the Fed “should also be wary of moving too gradually.” This is consistent with what the Fed has been trying to convey all this while i.e. barring drastically weaker than expected economic numbers, there will be one more rate hike in December.
Yet, market continues to underprice the probability of that rate hike (as shown below). Read more>>>