The euro is under pressure overall, trading close to new one-week lows. The EUR/USD exchange rate has fallen below 1.2900. On Wednesday, the euro/dollar struggled to make headway, trading under 1.0800 in the North American session. In fact, the euro has almost doubled in value against the US dollar. Hence this change reflects better long-term growth prospects for the eurozone and a narrowing interest rate differential with respect to the US.
The most likely scenario for EUR/USD in the medium term is sharp upside-downside whipsawing. Yet, despite these challenges, the shared currency remains an underappreciated candidate to appreciate. The eurozone’s growth outlook was significantly boosted in March, supported by expectations of massive fiscal stimulus. With greater volatility expected in the interest rate/currency markets, EUR/USD should remain under downward pressure.
Eurozone Growth Prospects
The eurozone’s growth prospects received a major lift, especially from expectations for large fiscal stimulus actions. Intra-regional trade is expected to see an even faster growth in pace in the upcoming year, led particularly by Germany. This rosy mood regarding growth prospects should keep a positive momentum on the EUR/USD exchange rate.
On balance, the eurozone’s long-term growth outlook should be more positive. We expect this shift to bolster the euro even more against the US dollar. Fiscal stimulus is just starting to kick in, corporate earnings will soon be sky high. As such we expect this boost to push the EUR/USD higher in Q2.
Influence of Interest Rates and Markets
Other determinants of the EUR/USD exchange rate Interest rates and market volatility. The closing interest rate gap between the euro and the US dollar has offered support to the euro. Rising volatility in interest rate and currency markets will likely keep affecting the exchange rate.
Moreover, the expected Bank of England interest rate cuts are set to support the EUR/USD. Economists expect the Federal Reserve to reduce interest rates on three occasions this year. These reductions would provide an increase to the euro’s strength.
Commodity Market Sentiment
Positive sentiment around the commodities market will likely favor EUR/USD as well. Worldwide equity indices are on the rise, with a forecast of something between flat and +5% in Q2. This strong momentum may be the source of further underlying support for the euro.
The US economy's expected weakness adds another layer of complexity to the currency pair's outlook. A somewhat weaker US economy would be a negative for EUR/USD, though improvements on other fronts could compensate for that effect.