Title: EUR/USD Projected to Climb Toward 1.40 Amid Diverging ECB and Fed Policies
Original Source: AInvest.com | Author: Vincent Gosselin
The Euro (EUR) is poised for significant potential growth against the US Dollar (USD), according to recent market analyses. The EUR/USD pair, currently trading below the 1.10 mark, is forecasted by several analysts to rise towards 1.40 in the medium to long term. This bullish outlook stems from the diverging monetary policies of the European Central Bank (ECB) and the Federal Reserve (Fed), with the former maintaining a hawkish tone and the latter leaning toward dovishness.
This article expands on Vincent Gosselin’s original insights from AInvest.com, offering a comprehensive view of the macroeconomic, technical, and geopolitical factors influencing this forecast.
Diverging Monetary Policies: Central Banks on Opposite Paths
The key driver of the projected EUR/USD rally is the policy divergence between the ECB and the Fed. As of 2024, the two central banks have adopted contrasting approaches to monetary tightening based on differing economic outlooks and domestic inflation pressures.
European Central Bank (ECB) — A Hawkish Stance
The ECB has continued to signal that more tightening may be needed to bring inflation down to its 2% target. Key factors contributing to this hawkish approach include:
– Continued Price Pressures: Although energy prices in the European Union have moderated, core inflation remains stubbornly above the ECB’s comfort levels.
– Wage Growth Concerns: Labor costs across several eurozone economies are on the rise, which could further stimulate inflation if left unchecked.
– Resilient Economic Activity: Despite earlier concerns of recession, the eurozone economy is showing signs of stabilization, providing the ECB a stronger backdrop to keep interest rates elevated or even raise them further if needed.
ECB President Christine Lagarde has reiterated on multiple occasions that inflation remains too high, reinforcing expectations that interest rates will be kept elevated. The market now expects that the ECB may conduct at least one more rate hike or maintain high rates for a prolonged period.
Federal Reserve (Fed) — Turning Dovish
In contrast, the Fed has begun signaling that the rate-hike cycle might be near its end as inflation in the US shows more consistent signs of moderation. Key indicators backing the Fed’s dovish shift include:
– Cooling Inflation: The Consumer Price Index (CPI) has shown a downward trend, with both headline and core inflation falling closer to target levels.
– Slowing Job Growth: While the US labor market remains tight, job creation has slowed and wage increases have become more modest, alleviating inflationary concerns.
– Softening Economic Data: A number of forward-looking indicators, such as ISM Manufacturing, Retail Sales, and Housing Starts, have begun to cool, suggesting the economy might be losing momentum.
Federal Reserve Chair Jerome Powell and other FOMC members have adopted a more cautious tone, emphasizing the need to avoid over-tightening. Market participants now anticipate that not only will the Fed pause rate hikes, but it could also begin cutting rates within the next 9 to 12 months.
Impact on Shifting Yield Differentials
The changes in monetary policy outlooks are beginning to reflect in the sovereign yield differentials between US and European government bonds. As yields in the eurozone remain stable or rise while those in the US begin to plateau or decline, capital flows could shift in favor of the euro.
Historically, higher bond yields attract foreign capital, thereby strengthening currency demand. If European 10-year yields soar past their US equivalents, the EUR would benefit from increased inflows from fixed-income investors.
Technical Landscape for EUR/USD
In terms of technical analysis, the EUR/USD pair has shown a strong medium-term bullish structure since bottoming out around parity in 2022. Analysts note the following technical factors supporting further upside:
– Strong Support Zones: The 1.05–1.06
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