Euro Rebounds gained ground in European trade on Thursday against a basket of major rivals, marking its first profit in three days. This rebound comes amid hopes of a reduced interest rate gap between Europe and the US, buoyed by recent weak US data that increased the likelihood of Federal Reserve rate cuts in September and November.
Exchange Rate Movements
- EUR/USD Movement: The EUR/USD pair edged up by 0.2% to $1.0858, with a session-low at $1.0828. This comes after a 0.15% decline on Wednesday
which saw the pair reach two-week lows at $1.0826 following weak European data.
European Interest Rates
- ECB Rate Cut Odds: The probability of a September interest rate cut by the European Central Bank (ECB) remains below 50%. Investors are waiting for new data to provide more insight into the growth and inflation trends in the eurozone.
US Interest Rates
- Fed Rate Cut Odds: A surprise contraction in US industrial activities has boosted the odds of a 0.25% rate cut by the Federal Reserve in September to 100%
with an additional 100% certainty of another rate cut in November.
Interest Rate Gap
- Current Gap: The current interest rate gap between Europe and the US stands at 125 basis points. This gap is expected to shrink to 100 basis points by September
assuming the predicted rate cuts in the US materialize.
Market Reactions
The euro’s rebound reflects market sentiments reacting to a possible narrowing of the interest rate differential between the eurozone and the US. This shift in expectations is largely driven by weak economic data from the US
which has increased the likelihood of the Federal Reserve implementing rate cuts to stimulate economic activity.
Implications for Investors
Investors are closely monitoring economic indicators and central bank signals from both sides of the Atlantic. The potential narrowing of the interest rate gap could lead to further strengthening of the euro against the dollar
impacting currency markets, trade, and investment strategies.
Conclusion
The Euro Rebounds recent gains highlight the dynamic interplay between economic data and monetary policy expectations. As markets await further data, the anticipated changes in interest rates by the ECB and the Fed will continue to influence the EUR/USD exchange rate and broader financial markets.