Weekly euro fundamental forecast
In December, the FOMC members predicted three federal funds rate hikes in 2022, they expected supply problems to end as the pandemic eased. No one could have imagined that the armed conflict in Ukraine would exacerbate the problem, sending inflation even higher. Furthermore, China's worst coronavirus outbreak could exacerbate supply pressures. The derivatives market gives a 70% chance of the Fed raising the rate by 1.75% by the end of the year. Bank of America predicts that the Fed will hike the rate five times in 2022 and another four ones in 2023. Why is the euro rising?
The US labour market is overheated and inflation is soaring. In normal conditions, the central bank would have to hike the rate by half a point at several meetings. However, the current situation can hardly be called normal. Annual inflation expectations, according to the New York Fed, accelerated in February from 5.8% to 6%, which is a record high since the records started in 2013 and a repeat of the November reading. The indicator growth outpaces the increase in the Treasury yields and presses down the real yields. The US is entering the Fed’s monetary tightening cycle with the lowest real Treasury yield since the 1970s. This means the federal funds rate could be raised very high. Most likely, in 2023 it will reach 2.5%.
Fed’s monetary tightening cycles and real Treasury yields
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