Authored by James Skinner
Originally published on PoundSterlingLive.com
Title: Euro to Dollar Weekly Forecast: EU Trade Deal Signals Further Euro Softness
The Euro-to-Dollar exchange rate enters the new week under pressure, facing a combination of Eurozone economic headwinds and a strengthening U.S. dollar. Analysts suggest that the EUR/USD pair may continue to decline in the near term, especially in light of recent data and policy developments. A fresh trade agreement reached between the United States and the European Union (EU) is also adding a layer of complexity to forecasts, hinting at potential downside pressure for the Euro.
Here is an in-depth analysis of the key drivers shaping the EUR/USD outlook over the coming week.
Macroeconomic Background
The Euro has struggled in recent trading sessions, with European Central Bank (ECB) policy divergence from the Federal Reserve weighing down the currency. While the ECB has begun easing monetary policy, signaling the start of an interest rate cutting cycle, the U.S. Federal Reserve has remained cautious, preferring to keep rates elevated in response to persistent inflationary pressures. This divergence creates a yield gap that favors the U.S. dollar over the Euro.
– The ECB delivered its first interest rate cut of the cycle in June, lowering the main deposit rate to 3.75 percent.
– Meanwhile, U.S. inflation has been more stubborn than expected, prompting the Fed to signal just one possible rate cut in 2024, if conditions allow.
– The U.S. continues to outperform the Eurozone in terms of economic growth and employment data, which further supports dollar strength.
Trade Agreement Adds to Euro Weakness
An announcement made late last week regarding a trade arrangement between the EU and the U.S. was viewed as bearish for the Euro. According to analysts, details emerging from the trade talks suggest long-term implications for trade balances that may result in net outflows from the Eurozone.
The trade agreement seeks to rebalance transatlantic production, especially in sectors such as green technology and resource extraction, with the aim of reducing European dependence on foreign supply chains. While positive from a strategic standpoint, it has immediate implications for foreign investment flows and cross-currency demand.
– The deal includes U.S. incentives for domestic sourcing of key raw materials, which could discourage European exporters.
– Investment flows may further pivot toward the U.S., negatively affecting Eurozone capital inflows.
– Analysts at Société Générale suggest that the agreement adds another reason for market participants to avoid long EUR/USD positions for now.
Market Reaction and Sentiment
Following the release of the trade deal news, the EUR/USD pair dipped further, continuing a broader downtrend seen over previous weeks. Market participants seem wary of betting on a Euro rebound, especially ahead of key U.S. macroeconomic events scheduled for the coming days.
– The EUR/USD dipped below the 1.0700 mark by the end of the week, a critical level watched by many traders.
– Options market pricing suggests a growing preference for downside protection in the currency pair.
– Investor positioning remains skewed in favor of the U.S. dollar due to interest rate differentials and risk sentiment.
Strategic Views from Analysts
Currency analysts maintain a broadly bearish tone on the Euro in their near-term forecasts. The combination of diverging central bank policies, relatively stronger U.S. economic performance, and now a transatlantic trade deal that might favor U.S. producers is dampening enthusiasm for a Euro recovery.
Société Générale currency strategists interpret the EU-U.S. trade deal as one more signal in a larger structural shift that supports dollar strength. They also note that current market positioning is still not significantly short on the Euro, meaning there is room for further unwinding and additional downside.
Key Insights:
– Société Générale states: “The trade agreement isn’t headline-grabbing, but it’s one more reason not to
Read more on EUR/USD trading.