The following article is a rewritten and expanded version of the original piece by Kenny Fisher, published on MarketPulse. This version aims to provide a thorough analysis of the recent movements in the EUR/USD currency pair, extending upon the original insights while maintaining the key themes and data points.
Title: Euro Under Pressure as EUR/USD Retreats Further from 2024 Highs
Author: Adapted from original article by Kenny Fisher, MarketPulse
The euro continues to stumble against the US dollar as downward momentum builds in the EUR/USD pair. This renewed selloff reflects shifting market sentiment, economic indicators out of the eurozone, and broader strength in the US dollar. After reaching its highest level of the year in April, the euro is now trading at significantly lower levels despite some temporary signs of recovery earlier in the second quarter.
As of the latest trading sessions, EUR/USD has dropped to around the 1.0660 area, marking a notable retreat from the highs seen earlier in the year around the 1.1130 mark. The pair’s decline highlights growing concerns about sluggish economic growth in the eurozone coupled with firming expectations of interest rate policy divergence between the European Central Bank (ECB) and the US Federal Reserve.
Key Developments Driving the EUR/USD Decline:
1. Eurozone Economic Outlook Remains Weak
– Recent economic data from across the eurozone continues to suggest that growth remains sluggish, with PMI (Purchasing Managers’ Index) readings showing limited expansion.
– The German economy, which serves as the eurozone’s engine, recorded lackluster industrial production and export figures. Germany’s dependency on global trade means any deterioration in demand, especially from China, has ripple effects on the broader eurozone.
– Inflation in the eurozone is showing signs of moderating, which supports expectations for the European Central Bank to begin cutting interest rates sooner than initially anticipated.
2. ECB Signaling Dovish Tilt
– ECB officials have hinted at the possibility of initiating a rate-cutting cycle as early as June 2024. This would mark a shift from tight monetary policy adopted to combat inflation in the earlier quarters.
– ECB President Christine Lagarde recently stated that progress is being made in bringing inflation back to the central bank’s 2 percent target. If inflation continues to trend downward, it strengthens the ECB’s case to begin monetary easing.
– As markets increasingly price in lower borrowing costs in the eurozone, the euro has come under selling pressure, especially in comparison to the US dollar, where expectations for rate cuts have been more tempered.
3. Strong US Dollar and Sticky Inflation
– The US dollar has advanced across major currency pairs, benefitting from a solid underlying economy and a central bank that remains cautious about lowering interest rates.
– A string of hotter-than-expected US inflation reports in Q1 and Q2 has led investors to scale back expectations for rate cuts by the Federal Reserve in 2024.
– Core PCE, the Fed’s preferred inflation gauge, remains above the 2% target, underscoring persistent price pressures that may delay any monetary easing.
– As a result, US Treasury yields remain elevated, boosting the dollar and making it more attractive to investors in the current risk environment.
4. Diverging Monetary Policy Expectations
– The divergence between the ECB and Fed is becoming increasingly apparent. Markets see a higher probability of the ECB embarking on a rate-cut cycle before the Fed, thereby widening interest rate differentials.
– Rate differentials are a critical determinant of currency values, and the widening gap favors the USD over the EUR.
– The Fed’s “higher-for-longer” narrative contrasts with the ECB’s growing openness to easing, reinforcing bearish pressure on the EUR/USD pair.
Recent Price Movements and Technical Analysis
EUR/USD has declined significantly from its April peak and is now grappling with key support levels.
Key technical observations include:
– The pair has broken below the 1.
Read more on EUR/USD trading.