The Federal Reserve hiked the target range by 75 bps to 1.50-1.75%. Economists at Danske Bank still expect EUR/USD to move to parity in 12 months.

Big rate hikes until inflation pressure eases

“Fed Chair Jerome Powell mentioned that the Fed can hike by another 75 bps in July but that we should not expect a series of 75 bps rate hikes. This sounds very similar to the May meeting when Powell mentioned that the committee was not ‘actively considering’ 75 bps. As long as inflation remains high, the Fed is forced to deliver.”  

“We change our Fed call now expecting the Fed to hike by 75 bps in July and 50 bps in September, November and December. If we are right, the Fed funds target range would be 3.75-4.00% by year-end (vs. Fed dot of 3.375% and market pricing of 3.5%).” 

“We still see risks skewed towards faster and more tightening given the inflation outlook. Our base case is that the US falls into a recession in Q2 23 but the faster hiking pace increases the risk that it starts earlier.”  

“We see inflation prints as remaining high amid a cyclical slowdown. If data confirms this, then we also expect Fed to underpin our forecast for seeing EUR/USD towards parity in 12M..”

“We see upside risks to our UST 10yr yield target of 3.50% in 3-6M.”