There may be one more reason why the USD is struggling to achieve floor towards the euro: the rate of interest differential. The market is now pricing in just below two rate of interest cuts by the Fed by the tip of the 12 months, however just one by the ECB. The truth that the Fed is prone to minimize charges extra sharply than the ECB this 12 months might be already largely priced into the EUR/USD. However, adjustments in expectations may result in changes in EUR/USD, Commerzbank’s FX analyst Antje Praefcke notes.
Price divergence caps USD positive aspects vs. Euro
“Due to this fact, the minutes of the final FOMC assembly in June are prone to appeal to consideration this night. The dot plots, i.e. the expectations of the FOMC members for the Fed Funds, appear to be drifting additional aside. For 2025, expectations continued to incorporate a 50 foundation level minimize in key rates of interest, i.e. two steps. Nevertheless, this was a detailed end result. Seven of the 19 assembly contributors don’t count on any additional cuts this 12 months (in March there have been solely 4) and two others count on just one minimize. However, eight assembly contributors anticipated two cuts and two anticipated three cuts.”
“Therefore, the discussions within the minutes concerning the situations below which extra FOMC members would possibly lean towards rate of interest cuts are prone to be scrutinized intently. Because the US labor market stays pretty strong and the inflation goal has roughly been achieved (PCE index at 2.3% in Might, core PCE index at 2.7%), our economists are most likely proper to not count on an rate of interest minimize earlier than September.”
“Nevertheless, a stronger tendency towards rate of interest cuts, which could possibly be interpreted because the Fed ‘giving in’ to sustained stress from the US president, may proceed to weigh on the USD and forestall it from making additional positive aspects or corrections.”
