Forex analytics. The dollar took the reins of power into its own hands – ForexNews.PRO
The ECB is done, the Fed is just starting. If the divergence in monetary policy means anything to Forex, the EURUSD will go up. Yes, the yield differential of American bonds is still significantly higher than that of their German counterparts. However, historically, a narrowing of the spread leads to a strengthening of the euro. Unless, of course, politics, geopolitics or other misfortunes prevent the euro.
The September meeting of the Governing Council turned out to be boring. As expected, the European Central Bank has kept the deposit rate at 2% for the second time in a row after a series of eight cuts since June 2024. The increase in the forecast for consumer prices for 2026 from 1.6% to 1.7%, expectations of GDP growth of 1.2% this year and 1% next year, as well as the rhetoric of Christine Lagarde convinced investors of the end of the cycle.
According to the Frenchwoman, inflation is where the ECB wants it to be, trade uncertainty has clearly decreased, and the risks of a slowdown in economic growth have decreased. Monetary policy is in the right place.
If one central bank has stopped, the dynamics of the currency pair directly depends on the actions of the other regulator. The Fed seems to continue to be in the position of trying to deflect a goalkeeper’s penalty. The US labor market is cooling, and inflation accelerated to its highest levels since the beginning of the year in August. However, in reality, the goalkeeper has already decided where to jump.
Throughout this year, the Fed has been faced with the question of whether the acceleration of inflation due to tariffs is a temporary phenomenon. Or is it a long-running process that requires maintaining high stakes?
The main argument in favor of the latter option was the situation when workers, concerned about rising prices, demanded higher salaries. However, if the labor market cools, this will not happen. Import duties will only temporarily accelerate CPI and PCE. So, it’s time to return to the cycle of monetary policy easing.
All other things being equal, the ECB’s passivity and an aggressive or gradual reduction in the federal funds rate should lead to a EURUSD rally. The only question is the speed of the Fed’s monetary expansion. However, something tells me that the path of the main currency pair to the north will be thorny.
The political crisis in France, the economic war of the West against Russia, and the associated increase in oil prices will certainly affect the data and may force the ECB to change its views. The resumption of the monetary policy easing cycle will be an unpleasant surprise for the euro.
