EUR/USD Gains May Be Capped by Strong US Labour Data
Commerzbank's Michael Pfister cautions that despite reduced expectations for Federal Reserve tightening, EUR/USD gains may be capped by strong US labour data. He notes that Kevin Warsh's lack of forward guidance does not preclude rate hikes and that stronger US employment numbers could shift market expectations back toward tighter policy.
Pfister points out that since last week's Fed meeting, expectations of interest rate hikes have been priced out, with the expectation now for 'only' 33 basis points by the end of the year, down from 44. This has contributed to EUR/USD climbing higher again.
The Commerzbank economist stresses that the absence of forward guidance does not mean there will be no change in interest rates, but rather that any change will not be announced in advance. He says that today's labour market figures could provide an initial indication of the direction of future monetary policy.
Commerzbank has cut its EUR/USD forecast by two cents across its horizon due to perceived Dollar hike risks rising. If today's figures are more positive than expected, it would suggest possible interest rate hikes and could deter market bets on a rate hike, but Pfister still does not believe the Fed intends to take this step.