Title: EUR/USD Outlook: Bulls Target 1.20 as Dollar Weakness Lingers
Original article by Fiona Cincotta, Forex.com
The EUR/USD currency pair has shown renewed bullish momentum, climbing to a four-month high as the US dollar continues to weaken amid shifting economic data and expectations surrounding Federal Reserve monetary policy. With the economic outlook in both the US and Eurozone diverging, the breakout in EUR/USD could pave the way for further gains. Investors and forex traders are closely watching key data releases and central bank commentary to detect the longer-term trajectory of the pair.
In this detailed analysis, we explore the fundamental and technical drivers behind EUR/USD’s recent moves, assess the impact of US and Eurozone economic indicators, and project the near-term targets and potential risks for the currency pair.
Recent Movement in EUR/USD
– EUR/USD has risen above 1.09, reaching a fresh four-month high.
– The pair appears driven by broader dollar weakness due to changing interest rate expectations in the US.
– The euro is benefiting from relatively stronger economic data in the Eurozone compared to the US.
Dollar Weakness: The Dominant Narrative
The US dollar has come under sustained pressure amid signs that the Federal Reserve may adopt a less aggressive monetary stance in the coming months. Despite previous market concerns that high inflation could prompt further rate hikes, recent data has indicated a mixed picture for the US economy, increasing the possibility of rate cuts later in 2024.
Key reasons behind dollar softness include:
– Cooling inflation: Although still above the Fed’s 2 percent target, inflation in the US is losing momentum, pointing toward a possible plateau in interest rates.
– Slowing job market: Recent non-farm payrolls data showed signs of cooling, reducing concerns about an overheating economy.
– Fading economic momentum: US consumer spending and business investment are showing signs of deceleration, raising fears of a potential economic slowdown.
With markets reassessing the trajectory of US interest rates, the greenback has retraced from its late-2023 highs, providing an opening for the euro to appreciate.
Fed’s Next Move Under Scrutiny
The key question for markets remains: when will the Federal Reserve begin cutting rates? As US data indicates a softer economic outlook, expectations for rate cuts in 2024 have grown, with some investors pricing in the first cut as early as the second half of the year.
– Fed officials, including Chair Jerome Powell, have reiterated a data-dependent approach.
– Core PCE inflation, the Fed’s preferred inflation gauge, continues to trend downwards.
– Markets are now anticipating two to three 25-basis point rate cuts by the end of 2024.
Should softer US data persist and inflation stay contained, the Fed may have room to ease monetary policy sooner than expected, potentially fueling further USD depreciation and EUR/USD upside.
Eurozone Stability and Improved Sentiment
On the other side of the equation, the euro has gained support on the back of improved economic sentiment in the Eurozone. Although the bloc’s overall economic growth remains modest, some green shoots have emerged, bolstering the euro against the dollar.
Positive factors for the euro include:
– Stabilizing inflation: Eurozone inflation is also showing signs of moderation, but at a slower pace than in the US, delaying ECB policy easing.
– Economic resilience: Surveys such as the ZEW Economic Sentiment Index and improving PMI data point to a rebound in business confidence.
– Hawkish European Central Bank (ECB) rhetoric: While the ECB is expected to cut interest rates eventually, policymakers remain cautious about moving too quickly, especially amid persistent core inflation.
Eurozone Uncertainty Still a Concern
Despite the recent upswing in sentiment, the Eurozone economy still faces structural challenges that may limit the euro’s upside in the medium term.
Risks for the euro include:
– Subdued consumer demand: Inflation and interest rate hikes have dampened household consumption.
– Weak manufacturing activity: Industrial production remains under pressure
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