The euro reached its highest level against the dollar this year, marking a significant shift from previous expectations and establishing itself as a strong competitor in the current global currency market. The euro’s rise above the $1.10 threshold has pushed the euro above $1.10 to more than 2.5% for August, which could qualify it for its best monthly performance since November.
Market dynamics have changed, with traders now focused on the euro after initially preoccupied with the appreciation of the Japanese yen following an unexpected rate hike by Bank Japan on July 31. In addition, the expectation of a US interest rate cut has weakened the dollar.
The euro’s performance is notable, not only because it is now the second-best-performing major currency against the dollar this year, lagging behind the pound, but also because it has reached an all-time high in terms of trade-weighted value. This is partly due to the weakness of emerging market currencies.
The currency analyst at Commerzbank attributed the euro’s strength to differences in interest rate movements between the US Federal Reserve and the European Central Bank. With inflation falling on both sides of the Atlantic, the Federal Reserve is expected to cut interest rates more aggressively, reducing the interest rate differential and supporting the euro’s strength.
Read also:Goldman Sachs expects the GBP pair to rise to this level!
The European Central Bank, which cut interest rates in June, could make at least two additional cuts of 25 basis points, as indicated in market pricing. In contrast, the market expects cuts of about 94 basis points from the Federal Reserve during its remaining three meetings this year. This represents a significant change from early August, when expectations of a rate cut at the ECB moved much less.
Despite the euro’s recent gains, analysts suggest that further progress could be difficult. The currency is currently at the top of its recent trading ranges, and there is limited scope for interest rate differentials to change in its favor. Commerzbank expects the euro to remain at $1.11 by the end of the year, while ING expects the euro to rise to $1.12 within a month before pulling back to $1.10. Bank of America expects the euro to reach $1.12 by the end of the year.
The economic recovery in the eurozone is showing signs of slowing, and German investor sentiment saw its biggest drop in two years in August. In contrast, upcoming US jobs data may suggest that a weak July report may indicate that the weak July report was an anomaly caused by Hurricane Beryl.
The upcoming US presidential election on November 5 adds another layer of complexity to the currency outlook. Analysts have pointed out that Republican candidate Donald Trump’s policy preferences could lead to higher inflation, necessitating tightening Federal Reserve policy and a stronger dollar.
Conversely, the euro’s recent rally coincided with the lead of its Democratic rival, Vice President Kamala Harris, in the polls. Rabobank’s head of currency strategy noted that Harris’ victory coupled with the slowdown in the US economy could keep the euro above $1.10.
Reuters contributed to this article.
This article was translated with the help of an artificial intelligence program after an editor’s review. For more details please refer to Banha Terms and Conditions
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