EUR/USD has been trending towards a breakout. It has been a fairly well-known fact that the EUR/USD currency pair was setting up for a breakout. And with recent market movements making it likely to soon at least test that 1.2000 mark, it would likely be because of dollar weakness. Even after the summer rally, analysts are cautioning that the good vibes won’t hold. They argue that the Federal Reserve’s forthcoming moves will save the dollar from a costly reality check against the renminbi.
As things stand, the market’s base case suggests EUR/USD should revert to the 1.15 to 1.16 area. Traders are still in the process of reassessing their positions. The 2-year EUR-USD swap spread has recently narrowed by 30 basis points since May. This change is strengthening the euro’s allure against the dollar.
Factors Influencing EUR/USD Movement
There are a number of reasons behind the rise of EUR/USD. Especially the current dollar weakness that was the most impacting factor behind the pair’s climbing. And traders are dusting off their reflation playbooks. They feel the momentum in the trade deals underway, which could provide additional tailwind to the euro.
The European Central Bank (ECB) has played a counterproductive, passive role. Even now, they have decided to do nothing and see how things play out as the global economic landscape shifts. This strategy would prevent any larger appreciation in EUR/USD, however it would permit a gradual increase in the near term. The unexpected and turbulent macroeconomic conditions have added to the rising uncertainty for EUR/USD. Current tariff deadlines and unpredictability in Trade War 2.0 add to this confusion.
U.S. economic data has a large effect on EUR/USD changes. Next week’s payrolls report will be a big one. Should those figures be a disappointment, it might awaken that narrative and help lay the groundwork for a Fed rate cut. Such changes would almost certainly strengthen the euro even more against the dollar.
Market Expectations and Predictions
Market participants are betting on at least a 20% odds of a rate cut by July. They are unfortunately all in on expecting a September cut. These expectations would be less impactful on EUR/USD’s course as traders react to changing monetary policy cues from the Fed.
European inflation data headed by Germany has jumped to 2.2%. This spike likely throws a wrench in the ECB’s plans for delivering rate cuts as early as December. Analysts have been cautioning this should make EUR/USD’s short-term outlook more challenging. Traders have had a hard time parsing the confusing signals coming from each side of the Atlantic.
Despite the optimism of euro bulls these last few weeks, market analysts remain cautiously skeptical about the sustainability of the euro’s recent performance. Just as many traders think that if EUR/USD gets above certain key resistance levels, it will run into trouble soon after. These headwinds have the potential to push it back down towards lower levels.