Policy Divergence Pressures EUR/USD
The euro weakened again against the US dollar in European trading on Wednesday (June 24th), extending its decline for the third consecutive day. EUR/USD fell to around 1.1350, pressured by the strengthening US dollar, which continues to dominate the foreign exchange market. Meanwhile, the US dollar index (DXY) approached 101.55, reflecting strong demand for the greenback amid expectations of a Fed interest rate hike.
The main pressure on the euro came from changing market expectations regarding the direction of Federal Reserve policy. Last week's Fed meeting under new Chairman Kevin Warsh was interpreted by the market as a hawkish signal. The latest dot plot shows that nine of 19 Fed officials now see the need for an interest rate hike this year. This represents a significant change from the previous projection in March, when no officials supported a rate hike.
Expectations for a US interest rate hike have also risen sharply. According to CME FedWatch, the market now estimates a 71% chance that the Fed will raise rates at its September meeting. This makes the US dollar increasingly attractive as investors seek the potential for higher yields. Conversely, the euro came under pressure as the gap in policy expectations between the Fed and the European Central Bank widened.
From the European side, pressure on the euro also came from the still-fragile eurozone economy. Recent data showed that eurozone private sector activity remained in contraction for the third consecutive month. Although some ECB officials still expect inflationary pressures to remain above the 2% target, the market sees the ECB's room to take a more aggressive stance becoming limited as economic growth remains insufficiently strong.
In addition to interest rate factors, the market is also monitoring the easing of geopolitical risks in the Middle East following improved prospects for peace between the United States and Iran. Easing energy price pressures could reduce the need for the ECB to tighten policy further. However, for the US dollar, the combination of a stronger economy, high Treasury yields, and the Fed's hawkish stance remains the primary driver.
Going forward, the direction of EUR/USD will depend heavily on US inflation data, particularly Personal Consumption Expenditures (PCE), the Fed's favorite indicator. If inflation data remains tepid, the dollar has the potential to continue strengthening, and EUR/USD could retest the lower area. However, if inflation begins to ease, pressure on the euro could ease, and the pair could attempt a technical rebound. (arl)
Source: Newsmaker.id
