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the Euro vs US Dollar The pair has reached multi-year highs due to economic factors, monetary policy and risk appetite. However, the euro faces challenges. Will the US dollar benefit from these weaknesses? Let’s discuss this topic and develop a trading plan.
The article covers the following topics:
Key points and highlights
- The gap between economic growth in the United States and the euro area is narrowing.
- The difference in the pace of monetary policy expansion between the Fed and the ECB is not as great as it seems.
- Jerome Powell may help dampen global risk appetite in Jackson Hole.
- A drop in the EUR/USD pair below 1.11 could lead to a pullback.
USD Daily Fundamental Forecast
The combination of increased global risk appetite, a narrowing gap between economic growth in the United States and the euro area, and a different pace of monetary expansion by the Federal Reserve and the European Central Bank has allowed the global economy to recover. Euro vs US Dollar The pair is on a winning streak to near 1.12. Bank of New York Mellon reported that money managers have been buying the euro on a daily basis over the past two weeks. UBS noted that algorithmic traders have made large sales of around $70-80 billion in August, with the eurozone currency emerging as a major beneficiary. The question remains whether it will be able to sustain its gains.
The latest Eurozone PMI data appears to have provided additional impetus to the EUR/USD rally. The Eurozone composite PMI accelerated to a three-month high while its US counterpart slowed. This suggests a narrowing of the economic growth gap on paper. However, a closer examination reveals that the European PMI gains are likely linked to the Paris Olympics. Once the effect wears off, the indices should return to their previous levels.
Eurozone PMI
Source: Bloomberg.
The same applies to the varying pace of monetary expansion. Before the release of the minutes of the ECB’s June meeting, the futures market was pricing in a 40% chance of a 25bp deposit rate cut in September and a 50bp easing rate in 2024. Compared to the 100bp federal funds rate, this factor has been a stimulus to inflation. Euro vs US Dollar But at the last meeting, the Governing Council noted that early autumn would be the best time to adjust monetary policy. As market expectations declined, the euro fell.
The European Central Bank has expressed minor concerns about the sustainability of service sector inflation. However, inflation expectations in the euro area are falling at a faster rate than in the US and UK. This suggests that the ECB should adopt a more aggressive stance in cutting interest rates, especially in light of the slowdown in average wage growth in the monetary bloc from 4.7% to 3.6% in the second quarter.
Inflation expectations in the US, UK and EU
Source: Financial Times.
The market underestimates the ECB’s resolve while overestimating the Fed’s capabilities. The divergence in the pace of monetary expansion is not as pronounced as it first appears. Once investors realize this, they tend to take more aggressive decisions. Euro vs US Dollar The pair may decline. Jerome Powell’s speech in Jackson Hole may be a signal to sell the major currency pair. Investors have overly optimistic expectations about it. US stock indices are growing at an accelerating rate, which is fueling global risk appetite. Is it time to ease these expectations?
Daily Trading Plan for EURUSD
Markets seem to be preparing to sell the euro based on the facts. In this scenario, a depreciation of the euro could lead to a devaluation of the currency. Euro vs US Dollar A price below 1.11 will generate a sell signal.
EURUSD currency pair real time price chart
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