The Euro breaks both its moving averages as the Fed's hike becomes certain

On Monday, the Euro broke both its moving averages for the first time since late July, falling below the 50-day and 200-day Exponential Moving Averages. The Dollar showed strength, rising against every major currency. The Federal Reserve signaled a significant rate hike, with futures indicating a 100% chance of a quarter-point increase on Wednesday, the first such hike since 2023.

In contrast, the European Central Bank had already raised rates last Thursday, and the Euro had fallen in every session since. The ECB increased its deposit rate to 2.50% on September 10, marking the second increase of the year. The central bank's statement indicated that inflation would remain well above target for an extended period.

The staff forecast projected inflation peaking at 3.6% in the fourth quarter and falling to 2.5% by mid-2024, assuming Brent crude oil prices remained steady. The assumption proved more impactful for the Euro than the Fed's rate hike, as Europe heavily imports oil priced in Dollars. The forecast also assumed the Euro would trade at 1.16 against the Dollar by 2028.

The Fed's projected rate hike was nearly a full point higher than today's level, while the ECB's expected rate increase was slightly above today's. Both central banks were pricing in three or four rate hikes, maintaining the current gap in their respective rates. The rate gap did not negatively impact the Euro on Monday, as other factors such as higher 10-year Treasury yields and Crude Oil prices also played a role.

The committee's June forecast had the Fed's rate at 3.8% for the end of 2023 and 3.6% for 2024, while the market now anticipates even higher rates. The ECB's upcoming statements and economic data releases, including Eurozone industrial production and American retail sales, will provide further insight into the currencies' future movements.