Published on 17.02.2023 15:10

The Euro has sunk to a more than a six-week peak low against the US dollar after the release of better than expected U.S. retail sales data on yesterday, bolstering investors' expectations that the US Federal Reserve would keep interest rate hikes forthcoming for some time to fight stubbornly high inflation.

Data showed that U.S. retail sales surged 3.0% last month against analysts’ expectations for a figure of 1.8 percent which marks the biggest, increase in nearly two years. The figure was also well above last month’s reading of -1.1 percent.

The news follows Tuesday’s announcement where  the U.S. government reported that consumer prices accelerated on a monthly basis in January, rising 0.5%, due in part to higher rental and food costs. The numbers where what analysts had been expecting but were well above the 0.1% month-on-month rise in December. Year-on-year prices rose 6.4%, down from 6.5% in December but above economists' expectations of a 6.2% gain.

"What all this has done, is it's pushed that terminal rate, just 25 basis points higher than in January. So, now, the terminal rate has been pushed to about 5.25," said Ivan Asensio, head of FX risk advisory at Silicon Valley Bank in San Francisco, referring to the U.S. central bank's benchmark overnight interest rate.

"It's not just that we have renewed expectations for now 25 (basis points higher) in March and then 25 as expected in May, but also the possibility that rates have to stay higher for longer. So, where is the plateau? Every day that goes by, the 2% inflation target for the Fed seems a bit far into the distance," he added.

In December, Fed policymakers' median projection saw the central bank's policy rate peaking at 5.1 percent this year. But interest rate futures markets have priced a peak above 5.2 percent hitting in July, and traders are becoming less sure that cuts are coming in 2023. Rates currently stand at 4.5 percent to 4.75 percent.

Deutsche Bank economists said they now expect the Fed to raise the policy rate to as high as 5.6%, having previously expected a 5.1% peak.

Looking further ahead today, the main drivers of the EUR/USD currency pair will be a round of monetary policy speeches from US Federal reserve board members Thomas Barkin and Michelle  Bowman where the question of further interest rate hikes are likely to be on the agenda.