Rewritten Article Based on Original Content from eFXdata.com
Original Author: eFXdata Team
Credit: eFXdata.com | Original article link: https://www.efxdata.com/insights/23657c34738084fe8f5d678edd0ef49b.html
Title: BNP Paribas: Anticipating EUR/USD Movements as Federal Reserve Highlights Neutral Rates Above Pre-Pandemic Levels
Overview:
In its latest research commentary, BNP Paribas examines recent remarks from Federal Reserve officials which suggest that the “neutral rate” of interest for the US economy may now be higher than historical norms. This evolving view among policymakers could have major implications for the EUR/USD currency pair over both short and medium-term horizons.
Neutral Rate in Focus
The concept of the “neutral rate” (also known as r-star) is central to current monetary policy discussions. The neutral rate is essentially the theoretical interest rate at which monetary policy is neither accommodative nor restrictive. When actual policy rates are above this level, policy is contractionary. Below it, monetary policy is considered expansionary.
Key Highlights:
– The Fed’s evolving view on r-star suggests the economy might require a higher real rate to achieve neutral monetary conditions following significant structural changes post-pandemic.
– Higher productivity trends and a recalibration of inflation expectations are contributing to this revision in the neutral rate.
– This has immediate implications for the Fed’s current stance and future rate cuts.
BNP Paribas’ analysis zeros in specifically on how this policy reassessment might influence the US dollar, particularly in its key pair vs the euro, EUR/USD.
Federal Reserve Changing Its Tone
In the most recent FOMC communications and speeches by regional Fed governors, a key theme has emerged: the possibility that pre-pandemic policy frameworks may no longer guide the current macroeconomic environment.
Most recent Fed statements indicate:
– Officials now believe that the real neutral rate has moved higher than earlier projections assumed.
– This shift is cited by members such as Fed Governor Christopher Waller and Chair Jerome Powell in public discussions.
– Broad consensus among policymakers suggests reluctance to cut interest rates too soon, fearing a misstep that could reignite inflationary pressures.
BNP Paribas interprets this shift in messaging as indicative of a more protracted period of higher policy rates. The longer the Fed maintains rates above perceived neutral levels, the greater the implications for the USD.
Impact on EUR/USD Outlook
The core FX view of BNP Paribas remains cautious on EUR/USD, and this conviction is supported further by shifting Fed sentiment.
Expectations from BNP Paribas include:
– A continued upside bias for the USD in the near term, particularly if market pricing adjusts to reflect higher-for-longer rates.
– EUR/USD is seen remaining in a broad range, with the upside capped due to the Fed’s hawkish tone and Europe’s relatively weaker macro outlook.
– BNP Paribas’ FX strategy desk believes that any EUR/USD rallies toward 1.09 to 1.10 are unlikely to be sustained unless there is a dovish surprise from the Fed or data significantly weakens in the US.
Several factors currently support USD strength:
– Divergence in economic data: US economic activity has proved more resilient than the eurozone, where recent data has underwhelmed market expectations.
– Differences in inflation: Although headline inflation has cooled on both sides of the Atlantic, core inflation in the US remains stickier than in the eurozone.
– ECB Policy Path: The European Central Bank seems more inclined toward cuts in the near-to-medium term compared to the Fed, which continues to guard against inflation surprises.
Shifts in Market Pricing
Interest rate markets have already begun to price in a re-evaluation of the Fed’s path for rate cuts. Earlier in 2024, the market had priced in multiple cuts, but those expectations have since been pared back.
BNP Paribas notes the following recent trends:
– The implied Fed funds rate for
Read more on EUR/USD trading.