The euro dollar rises and remains above 1.0800 in European morning trade. Data from Germany and the EU showed that commercial activity in the private sector grew at an accelerated pace in May, helping the community currency regain demand.
The pair’s gains are part of a complex context, in which the divergence in monetary policy of the two main central banks, the Fed and the ECBrisks impacting above all on currency market.
After the Federal Reserve confirmed uncertainty over the cuts by posting on its minutes that the cost of borrowing will remain higher for longer, the greenback settled near a one-week high on Thursday, after recording its biggest daily percentage gain. this month versus a basket of currencies the day before.
However, more optimistic sentiment on Eurozone economic activity helped the pair rise. L’EUR/USD Is he destined to earn more? The exchange rate forecasts, with the spotlight on the Fed, ECB, rates and growth.
EUR/USD rises, but everything can change for the pair
The commercial activity of private sector of the Eurozone reached its highest level of the year, suggesting the region’s economic recovery is gaining traction. With these more optimistic preliminary PMI data for the area, the euro has recovered. The context, however, still appears to be favorable to the strong dollar.
Observing the exchanges, the euro dollar is up 0.16% at 1.0838 at around 11am this morning. In a week, the exchange rate lost momentum and from the peak of 1.088 on May 20th it followed oscillating trends but always below this threshold. The monthly comparison, however, is more favorable. EUR/USD moved from 1.069 on April 23 to 1.084 today, an increase of 1.4%.
The factor that is most influencing the couple is the so-called divergence between Fed and ECB about the next rate cut. The discreet dollar rebound in recent days has indeed coincided with a generally positive performance of US yields over various durations, as investors continued to anticipate that the Fed would begin its easing cycle in September, in contrast to the possibility of the ECB initiating rate cuts interest potentially as early as June.
As for the Fed, CME Group’s FedWatch tool suggests a nearly 62% chance of lower interest rates by September. Not only that, “many” FOMC members questioned whether the policy was sufficiently restrictive as written in the Fed minutes.
Some have even hypothesized the possibility of increases in the cost of US money. This would be a strong upside driver for the dollar.
According to ING strategists, the greenback index may fail to trade sustainably above 105.0 for now, “although we do not rule out a further one gradual appreciation of the dollar in the US PCE publication of May 31st”.
As regards the euro, ING analysts focus on the wage index negotiated by the ECB. There is great uncertainty about the path of monetary policy beyond June, and German payroll data released yesterday was stronger than expected. For today’s release, expectations [sui salari] they are for another decline from the 4.5% quarter-on-quarter in Q4 2023. This can certainly move the needle on ECB cut bets beyond June.
And have an impact on the euro. For FXstreet, looking ahead, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, support the ongoing narrative of Fed-ECB policy divergence and lean towards a stronger dollar in the long termespecially considering the growing probability that the ECB will reduce rates well before the Fed. Given this perspective, in the medium term the possibility of further weakness in the EUR/USD exchange rateanalysts highlighted.
