The Fed holds its policy meeting later today, and any move other than a half-point hike would be a huge surprise. A half-point increase is significant, as it will mark the Fed’s largest rate increase in 20 years and demonstrates that the Fed is determined to lower inflation. The half-point increase has been priced in, but investors will be monitoring the hawkishness of the rate statement, as well as the size of the trim to the Fed’s balance sheet (quantitative tightening).
The Fed has been transparent with the markets, and we’re likely to see further rate hikes in June and July. I expect to see a front-loaded hiking cycle, as the Fed feels it can load up on rate increases early on without dampening growth. The plan is to then ease up on increases, hopefully allowing the economy to make a soft landing and avoiding a recession.
The Ukraine war and the ensuing sanctions against Russia have taken a toll on the eurozone economy. This point was brought home as German exports dropped sharply in March, falling 3.3% MoM. The driver behind the downswing was the plunge in exports to Russia, which dropped by 60% MoM.
Another headwind for the German economy is the fall in growth in China in recent months. Last week, the German government cut its growth forecast for 2022 to 2.2%, down sharply from 3.6% in a previous forecast. The severe COVID lockdowns have resulted in prolonged supply chain disruptions. This could spell trouble for the German economy, with a recent Ifo survey noting that almost half of German companies are dependent on imports from China.
With question marks surrounding Germany, the eurozone’s largest economy, the risk to the euro is tilted downwards. EUR/USD fell 4.71% in April, and if the euro falls below 1.03, it could drop all the way to parity.
EUR/USD Technical
- There is resistance at 1.0612 and 1.0699
- 1.0408 is providing support, followed by 1.0321
