Deepening divergence in the policy of the FED and the ECB

EUR / USD exchange rate it has been growing steadily for more than a week. The price is above 1,12, a level not seen since February 2022. Changes in the chart illustrate how the market perceives the future actions of the Fed and the ECB.

While they are getting louder speculation about the possible end of the cycle by the Fed at the July meeting, the ECB is still perceived as a more restrictive bank. This was confirmed by yesterday's minutes from the last meeting.

The growth streak continues

Yesterday's data on the dynamics of producer prices in the US only joined the disinflationary trend and added their brick in the dollar depreciation process. PPI increased less than expected, which only supported voices in favor of ending the rate hike process in Usa. The Eurodollar rose above 1,12, which means that the upward streak has been going on continuously for over a week. This morning brings a cosmetic correction.

While the US inflation data fueled the debate among market participants about the imminent end of hikes, the minutes of the June ECB meeting reminded that the situation in the euro zone not so comfortable yet as in the United States. Persistent inflation remains a serious concern EBC. At the last meeting, there was even a preference for a larger rate hike of 50 bp.

As we already know, inflation in the euro area turned out to be quite stubborn also in June. It was the special effects that prevented the base indicator from falling. Inflation developments in the US are more convincing, while there is no reason for the ECB to be less concerned.

As a result, the market still assumes a few more rate hikes by the ECB. The first cuts in the cost of money by the European bank are priced very cautiously, the opposite is true for the Fed, where the chance for the first downward move later this year has recently increased again.

Source: Łukasz Zembik, OANDA TMS Brokers