The Fed and ECB have more in common than you would think

<p>The Fed delivered a 25 bps this week and left the door open for a September move but they were not too pushy about it. There was no explicit guidance to suggest that such a move is a given and they maintained that any move after the summer will be highly dependent on economic data in the coming two months.</p><p>Does that sound familiar?</p><p>You can basically just replace the name of the Fed with the ECB and you basically have the exact same thing that Lagarde &amp; co. are likely to deliver later today.</p><p>Given that the ECB will only deliver its next set of economic forecasts in September and the fact that they are trying to keep things flexible, it is extremely unlikely to see them pre-commit to anything on September today.</p><p>A 25 bps rate hike is a given but don't expect Lagarde to outright say that they will do so again after the summer. If anything else, she is likely to push it back to markets by saying that they could hold rates unchanged or even go at it more hawkishly if need be. At the end of the day, it will all come down to the data.</p><p>There's always going to be two sets of arguments in this instance. If inflation continues to keep hot – especially core inflation – and wage pressures keep up (tight labour market conditions), there is reason for the ECB to keep tightening policy in Q3. But on the flip side, as economic conditions worsen with a credit crunch looming and perhaps accompanied by lower inflation data, there is also reason for the ECB to perhaps pause and reassess.</p><p>Now, does the above also sound somewhat familiar?</p><p>Well, because the same can also be applied to the Fed and their current predicament.</p><p>So, to say that there is a big divergence between the Fed and ECB outlook might be somewhat misplaced at the moment I would say. And even the rates curve for the ECB is at most seeing one more rate hike after today, before reverting to a similar schedule as what we are seeing in the Fed funds futures curve <a href="https://www.forexlive.com/news/dollar-bruised-after-the-fed-policy-decision-overnight-20230727/" target="_blank" rel="follow">here</a>.</p>

This article was written by Justin Low at www.forexlive.com.