Euro-Dollar Awaits Clear Incentives

9 Mayıs 2024

Today’s market analysis on behalf of Rania Gule Market Analyst at XS.com

The EUR/USD pair tested the 1.0750 level again to begin Wednesday's trading near 1.0740,
as markets seek signals for a clear direction. Risk appetite has diminished after Federal
Reserve officials cautioned against hopes for near-term interest rate cuts, yet markets still
price in at least two cuts in 2024, with the first expected in September.

European retail sales also rebounded more than expected yesterday by 0.8% compared to
the previous month in March, but the euro remained sluggish, and the EUR/USD pair failed
to push upwards to reach 1.0790.

It is worth noting that during the Federal Reserve meeting, the committee reiterated its
readiness to adjust interest rates while expressing concerns about inflation and potential
risks to economic stability. The central bank hinted at a slowdown in the pace of fiscal
easing, while Federal Reserve Chair Jerome Powell suggested that the next monetary policy
move is unlikely to involve raising interest rates.

Therefore, I expect the current weakness of the US dollar to be temporary due to deferred
expectations of the Federal Reserve cutting interest rates later in the year. At the same time,
the monetary policy climate remains unchanged, highlighting the contrast between the
Federal Reserve and other central banks in the Group of Ten, especially the European
Central Bank.

Recent statements from European Central Bank officials have hinted at the possibility of the
bank starting its easing cycle in June, raising expectations for three interest rate cuts
(equivalent to 75 basis points) for the remainder of the year. Doubts are still growing about
the central bank's potential subsequent decisions during this year.

Looking ahead, I believe that relatively weak economic fundamentals in the euro area, along
with the resilience of the US economy, reinforce expectations for the dollar's strength over
the medium term, particularly with the increasing likelihood of the European Central Bank
cutting interest rates long before the Federal Reserve. This means that further weakness in
the EUR/USD pair remains a possibility in the medium term.