Citi says the Federal Reserve’s latest meeting reduced the risk of further US rate hikes, limiting the Dollar’s upside and supporting EUR/USD despite three hawkish dissents.
The Euro-to-Dollar exchange rate (EUR/USD) held firm after the Federal Reserve left interest rates unchanged, with Citi arguing that Chair Kevin Warsh struck a more dovish tone than markets had expected.
Although three Fed officials dissented in favour of an immediate rate increase, Citi believes investors focused instead on Warsh’s press conference.
“We read Chair Warsh’s comments at the press conference as dovish,” the bank said.
According to Citi, Warsh indicated that “higher rates might be the dominant but not the only solution to higher inflation”, while also signalling a broader approach to inflation than simply focusing on core PCE.
The bank argues those comments reduced expectations of further tightening.
“The curve steepened materially as markets priced out September and October hikes,” Citi noted, adding that Warsh appears comfortable allowing tighter financial conditions to do some of the Fed’s work.
Rather than pushing for another immediate increase in rates, Citi believes “Warsh’s ideal world is one where he keeps the Fed on hold while also keeping the curve steep.”
Citi believes the Fed outcome caps near-term Dollar upside rather than triggering a sustained Dollar decline.
The bank cautions that stronger inflation or labour-market data could quickly revive rate-hike expectations, but for now the Fed’s communication has shifted the balance of risks.
With markets reassessing the path for US interest rates, Citi sees a less supportive backdrop for further Dollar gains, offering EUR/USD scope to remain supported in the near term.
Our currency coverage draws on live market data, official economic releases and published bank research.
