Besides the pressures from abroad, the Euro is still buckling under the weight of the growing inflation within the countries.
The economic crisis in the European Union is about to get more strained as the region’s currency, the Euro is down to 0.9780 against the United States Dollar, the lowest level recorded in 20 years. The weakening Euro is going to make EU countries more burdened as the energy crisis rocking the region is showing no signs of slowing down in the near future.
The bullish advantage of the USD follows the third consecutive 75 basis points interest rate hike from the Federal Reserve on Wednesday. The rate hike strengthened the position of the Dollar against a basket of other national currencies, but the Euro took a more significant hit this time.
“The risks for financial markets are threefold. First, there remains uncertainty over when the Fed ends this rate hiking cycle. Second, the pace of the increase creates further risk for markets. Third, the economic consequences – which are experienced with a 12 to 18-month lag – will depend on the level and pace of hikes,” said Daniel Casali, Chief Investment Strategist at wealth manager Evelyn Partners.
Besides the pressures from abroad, the Euro is still buckling under the weight of the growing inflation within the countries using it as the official legal tender. Like the United States Federal Reserve, the European Central Bank (ECB) also has a hawkish stance against the growing inflation rate.
With the ECB more poised to hike rates in a milder way considering the close proximity it now is to entering a recession, extra consideration is being made as regards the monetary policies in a bid not to exacerbate the economic pains of stakeholders in the region.
Impacts of Increasing Feds Funds Rate on the Euro
The consecutive interest rate hikes have continued to upshoot the Feds fund rate which is now placed at 3 – 3.25%, more bullish guidance is often provided considering the aggressive rate at which the interest rate is being hiked.
“With respect to the first two points, there is some guidance from the FOMC’s latest interest rate projections, which are released at the end of every calendar quarter meeting,” Casali noted, building on the earlier comment, “The FOMC median Fed Funds interest rate forecasts (the so-called “DOTS”) of committee members rose to 4.4% (3.4% in June) for end-2022, 4.6% (3.8% in June) for end-2023, and 3.9% (3.4% in June) for end-2024. These forecasts indicate that US rates are set to rise further from here before falling in 2024.”
Considering the fact that the US economy is the largest in the world, every decision that is made by the Federal Reserve is bound to trickle down to other economies including that of Europe. Armed with this knowledge, the ECB will need to do all within its power to prevent the continuous freefall of the Euro.