DBS strategist Philip Wee notes markets have strong expectations that the European Central Bank will hike at its next meeting, even as the Federal Reserve (Fed) debates internal reforms.

ECB tightening supports EUR/USD

"Newly sworn-in Fed Chair Kevin Warsh will still face his first true test at managing a divided Fed at the June 16-17 FOMC. The committee voted 8-4 to keep the Fed Funds Rate unchanged at the April meeting, with one member favouring a 25-bps cut and three members objecting to maintaining the easing bias language.

"Against this background, it was not surprising that ECB President Christine Lagarde believed the Fed’s independence was still at risk."

"While the Fed debates internal structural reforms, other major central banks are playing a more straightforward defensive game."

"The markets have the strongest bets for the European Central Bank, the Bank of Japan, and the Reserve Bank of New Zealand to hike at their next meetings."

"A DXY Index below 98 could send EUR/USD back above 1.18."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)