The Federal Reserve raised the target range by 75 basis points, to 1.50-1.75%. The Danske Bank economists still expect EUR/USD to move towards parity in 12 months.
Large rate hikes until inflationary pressure subsides
“Fed Chairman Jerome Powell mentioned that the Fed may hike another 75 basis points in July, but we shouldn’t expect a series of 75 basis point rate hikes. This sounds very similar to the May meeting, when Powell mentioned that the committee was not ‘actively considering’ 75 basis points. As long as inflation remains high, the Fed is bound to comply.”
“We changed our view, and we think that the Fed will raise 75 bps in July and 50 bps in September, November and December. If we are correct, the target range of the Fed funds would be in the 3.75-4.00% end of the year (vs. Fed projection of 3.375% and market valuation of 3.5%).”
“We continue to see the risks tilt towards a faster and larger tightening, given the inflation outlook. Our assumption is that the US falls into a recession in the second quarter of 2023, but the faster pace of rate hikes increases the risk of it starting sooner.”
“We see that the inflation figures remain high amid a cyclical slowdown. If the data confirms it, also we expect the Fed to underpin our view of seeing EUR/USD at parity within 12 months.”
“We see upside risks to our 10-year US bond yield target at 3.50% over 3-6 months.”
Source: Fx Street
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