December Nears: Fed and ECB Anticipate Further Rate Hikes Amid Persistent Inflation
- Persistent core inflation strengthens the case for further Fed tightening.
- December appears the more likely timing for another US rate increase.
- Hawkish ECB comments also point towards another hike before year-end.
- EUR/USD may depend on differences in the expected scale of tightening.
Persistent inflation is strengthening the case for further monetary tightening in both the United States and the euro area. December remains the more likely timing for subsequent rate hikes, although the October meetings could provide clearer signals about future decisions.
US inflation shows little progress
September’s US data showed that price pressures extended beyond rising energy costs. Core CPI inflation exceeded forecasts, with its annual rate increasing by 0.2 percentage points to 2.6%. Having started the year at 2.5%, it shows little evidence of sustained progress toward lower inflation.
The Fed’s preferred inflation measure, the personal consumption expenditures price index, paints a similar picture. Core PCE inflation remains close to its level at the start of the year, at 3%, staying above the corresponding CPI measure.
Source: Tradingeconomics
The dollar initially strengthened after the release of latest inflation data, boosting EUR/USD near 1.11. The currency later surged past 1.12, suggesting that upcoming rate hikes are already largely baked into market prices. However, such quick reversals could also hint at room for an upward correction in EUR/USD soon, particularly as no clear technical support exists following the earlier dip.
Fed likely to wait until December
For the Federal Reserve, the inflation trajectory offers only marginal ground to finalize the tightening cycle. Kevin Warsh stresses that decisions must reflect the broader economy rather than isolated updates.
Yet, core inflation staying elevated implies that prior tightening measures were insufficient to achieve price stability. A late-October hike—especially before the congressional elections—is considered less probable, whereas December appears the more certain window for another movement.
ECB officials signal further tightening
Growing hawkish signals are surfacing from the European Central Bank debate. Former Dutch chief, Klaas Knot, argues that economic and geopolitical shifts warrant a modest tightening bias.
Pierre Wunsch predicts another rate increase is likely. Gediminas Simkus, too, favors a tighter stance citing improved conviction since September.
- Simkus emphasizes the significance of the December meeting, where fuller data sets will be reviewed.
- He also underscores the importance of the October gathering, reinforcing the likelihood of a second ECB hike this year, most likely in December.
Relative policy expectations matter for EUR/USD
As rate increases approach from both the American and Euro zones, sole hawkish Fed messaging may fail to sustain a EUR/USD premium. More pivotal is which central bank champions deeper cumulative tightening.
When expectations for the Fed and the ECB converge, the potency of monetary policy on EUR/USD tends to wane. Divergence between these outlooks would create stronger market dislocation.