Euro climbs on Fed rate hike

As expected, the Federal Reserve raised interest rates by 25 basis points to 5.00-5.25%, the highest level since 2007. The FOMC also removed forward guidance about further rate hikes but noted that the timing of future rate changes would depend on incoming economic data. The bias still favors further tightening. The currency market saw limited impact and the Euro even climbed against the US dollar

Analysts at Societe Generale have put forward their view

With the Fed funds target range of 5.00-5.25% the Fed has met its dot-plot guidance from last December and updated as of March. A pause is the next step. A full stop requires confirmation that inflation pressures (rents in particular) subside and employment slows.

Wall Street stocks closed lower, and US bond yields declined further, putting pressure on the US Dollar. The US Dollar Index (DXY) closed at its lowest level in a week, around 101.35 but remained above recent lows. Meanwhile, the US 10-year yield settled at 3.36%, marking a one-month low.

The US will release data on Q1 Unit Labor Costs and weekly Jobless Claims on Thursday. The ADP Employment report for April showed a surge in private payrolls, rising by 296K and surpassing expectations. However, the market's reaction to the data was muted as investors await Friday's Nonfarm Payrolls report.

The focus has shifted to the upcoming European Central Bank (ECB) meeting, where a 25 basis point rate hike is expected, but a 50 basis point hike is also possible. The outcome of the meeting is likely to trigger reactions in the Euro. The EUR/USD pair approached 1.1100 after the FOMC statement before returning to 1.1050. Despite the limited upside, the pair remains bullish.