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EUR/USD UNDER PRESSURE DUE TO CURRENT DOLLAR DYNAMICS, GEOPOLITICAL MATTER & FED/ECB DIVERGENT POLICY MEASURES

Harvest Global Markets :

Europe is under inflationary pressure after the release of May’s CPI data that showed a spike in the inflation to 8.1% YoY. The economy forecasted a 7.7% CPI, up from 7.5%. Core numbers also printed above expectations at 3.8% Vs 3.5% forecasted. European Central Bank is looking towards monetary policy tightening in Q3 after the results indicate an aggressive move to control inflationary pressure. Although, it may be more likely for ECB to increase the 25bps hike in the July meeting.

Slower growth in Europe raises questions about possible aggressive measures that ECB would take to overcome the economic crisis. Also, dollar demand can put downside pressure on Euro in addition to the current geopolitical crisis. Keep in mind, that EU leaders agreeing to a partial oil embargo on Russia will block 2/3 of Russian oil imports, will ultimately weigh on the growth outlook for the EU going forward, and by extension will pressure the Euro.

Euro recovered approximately 4% from its recent low that signaling slightly aggressive comments in the next week’s ECB meeting. Last week. Fed’s member comments suggested sticking to a 50bps hike in the next meeting, allowing the dollar to remain elevated. With recent economic issues, it may be unlikely to pause tightening in the near term. The Euro has benefited tremendously of late from recent headlines out of the ECB, as policymakers look set to move away from negative interest rates while inflation rages across the continent. At the same time, comments from Atlanta Fed President Raphael Bostic opened the door to a potential pause from the FOMC at the September policy meeting.

However, EUR/USD is still under pressure due to current dollar-dominated dynamics, geopolitical matters, and divergent policy between ECB and FED. The recent development in the Euro area is showing the moderate pace of German bond yields and decent recovery of the Eurozone, which can support the economy as well as the Euro. The market’s risk appetite wanes amid indecision over the Fed’s next move and geopolitical headlines. However, covid news and receding bets on the Fed’s aggressive rate hikes seem to favor the US stock futures.

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