Euro May Turn Lower vs. Dollar After 6-Week Rebound Hits a Wall
Euro May Turn Lower vs. Dollar After 6-Week Rebound Hits a Wall
By:Ilya Spivak
The euro recovered against the dollar as soggy U.S. economic data pushed markets to recalibrate Fed vs. ECB rate-cut expectations
The euro scores a six-week rise vs. dollar as U.S. data shifts relative policy outlook.
Fed vs. ECB rate cuts in 2025 are now in focus as speculation on this year settles.
Soft Eurozone CPI data may pressure the euro as markets readjust again.
Two weeks ago, the euro looked poised to turn the tide against an ascendant U.S. dollar. The single currency punched higher in a move that broke the series of lower highs and lows that defined the downward trend since the beginning of the year as U.S. inflation data weighed on the greenback.
That might have set the stage for further gains. As it happened, they’ve not materialized. The euro hit a wall the very next day after its would-be breakout, then slid back. It has since settled in an uneasy range between the 1.08 and 1.09 figures.
How dovish is the ECB? It’s all relative
The euro still has the dubious honor of being attached to the most dovish of the major central banks, according to policy expectations priced into interest rate futures. The European Central Bank (ECB) is expected to deliver 69 basis points (bps) in rate cuts this year, compared with just 24 bps left on the menu for the Federal Reserve.
This might have been expected to support the dollar against its European counterpart. It did precisely that since January and through mid-April, which saw the euro shed over 4.8%. The rebound played out over the past six weeks appeared as traders looked further downfield.
Over this time, the spread between the Fed and ECB policy rates expected by the end of this year has held broadly steady, oscillating in a narrow range around 40bps. The path thereafter has shifted in the euro’s favor, however. While the 2025 rate cut tally for the ECB has barely budged, that of the Fed has moved from 40bps to 63bps in easing.
Euro at risk as inflation data looms ahead
Divergence in the tone of economic news-flow seems to have accounted for the change. Analytics from Citigroup show U.S. data outcomes deteriorating relative to baseline forecasts while those from across the Atlantic are little changed over the very six weeks that the euro has recovered.
The spotlight now turns to Eurozone consumer price index (CPI) data. It is expected to show that headline inflation inched up to 2.5% year-on-year in May after hitting a four-month low of 2.4% in March and idling there in April.
The leading PMI survey data points to softening pricing power this month, even as the rebound in economic activity speeds up. If that sets the stage for a downside CPI surprise, a readjustment of the priced-in policy path back in the greenback’s favor might put the euro on the defensive.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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