The EUR/USD currency pair has held steady in Wednesday’s European morning, after giving up some of its gains from the previous two days. The euro is being supported by expectations that the Federal Reserve won’t raise borrowing costs by much more this year, and by signs that the banking sector’s struggles with a higher interest-rate environment won’t lead to a more general contagion.
Investors are betting that the Fed will be cautious in its approach to raising interest rates, given the uncertainties of the pandemic’s impact on the economy. The Fed has already signaled that it will start to taper its bond-buying program this year, but many analysts believe that the central bank will take a more gradual approach to raising interest rates than it has in the past.
Fed likely to maintain a patient approach to rate hikes
The Fed has said that it wants to see more progress in the labor market before it raises interest rates, and it has also indicated that it will be patient in its approach to tightening monetary policy. This has helped to support the EUR/USD currency pair, as investors are betting that the Fed will take a slower and more cautious approach to rate hikes than previously anticipated.
This patient approach by the Fed is also reflected in the market’s expectations for future interest rates. The yield on 10-year Treasury notes has fallen in recent weeks, indicating that investors are betting on a slower pace of Fed tightening.
Banking sector struggles not expected to spread
Another factor supporting the EUR/USD currency pair is the belief that the recent struggles in the banking sector will not lead to a more general contagion. Several large banks have reported losses related to the recent rise in interest rates, but analysts believe that these losses are manageable and not indicative of broader problems in the banking sector.
This view is supported by the fact that many banks have already taken steps to mitigate their exposure to rising interest rates. For example, some banks have increased their holdings of shorter-term debt, which is less sensitive to interest-rate changes.
Conclusion
In conclusion, the EUR/USD currency pair is being supported by expectations that the Fed will take a slower and more cautious approach to raising interest rates, and by the belief that the recent struggles in the banking sector will not lead to a more general contagion.
