Euro/US Dollar Exchange Rate Tumbles on ECB, Fed Interest Rate Forecasts
The Euro posted its largest single-day decline against the US Dollar in its 9-year history, as a very clear repricing of risks to the European economy shook even the most ardent EURUSD bull. Interest rate traders now expect that the European Central Bank will have to cut its short-term interest rate target by 95 basis points in the year ahead—compared with 35bp of interest rate hikes from the US Federal Reserve. Such a shift clearly suggests that markets believe current US financial market and economic difficulties will spread to the Euro Zone, and the difference between rate expectations now stands at its most negative in at least 2 years. Such a re-pricing of economic risk has likewise coincided with a sharp pullback in the Euro/US dollar exchange rate, and any further widening of interest rate forecasts could only further fuel EURUSD declines.
European Central Bank and US Federal Reserve Overnight Index Swap Spreads
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