On Wednesday, the value of the US dollar declined due to discouraging data on Eurozone activity, hinting at a possible interest rate cut by the European Central Bank. At 14:30 Riyadh time, the dollar index fell 0.03% to 104.142, after rising overnight.
“The impact of political fluctuations on the value of the US dollar”: The US dollar appears to be seeking to benefit from the political uncertainty surrounding it, as it has received positive support from shifts in the US political landscape. Vice President Kamala Harris of Lockheed Martin has received strong support from the Democratic Party after being endorsed as the presidential nominee by President Joe Biden. According to an opinion poll she conducted, she is slightly ahead of Republican candidate Donald Trump. Despite this, Trump remains the candidate most likely to win the presidential election scheduled for November. The impact of the June CPI report has seen the US dollar’s losses against most currencies fade, while the Japanese yen, Swiss franc and British pound emerged as major winners in this context, analysts at ING said in a note.
“The role of Trump’s trade in the foreign exchange market and the impact of upcoming data”: Despite the clear impact that Trump’s trade has on the market, Friday will witness the release of US inflation data, which includes personal consumption expenditures for the month of June. The performance of the Federal Reserve’s designated measure of inflation could quickly change Forex market sentiment.
Federal Open Market Committee meeting: ING Bank expects that the first step will come at the Federal Open Market Committee meeting in September, with two additional cuts in November and December, compared to agreed expectations of cuts of 50 basis points this year. Business surveys suggest caution is warranted about the economic outlook
EURUSD Basis Forecast 2024
The European Central Bank’s latest monetary policy meeting paved the way for a possible interest rate cut in June. However, future data indicating a slowdown in inflation and wage growth could push the ECB to follow this path. The actual rate of decline in inflation has exceeded the European Central Bank’s expectations, which are set firmly at 2% or less for the second half of 2025 and beyond.
Many ECB policymakers are increasingly concerned about the possibility of lower inflation if interest rates are not cut. However, recent events may prompt many ECB hawks (advocates of higher interest rates) to reconsider a rate cut in June.
On the other hand, the Federal Reserve chose to keep interest rates unchanged, stressing that its current policy stance is “in a good position.” However, officials remain concerned about the recent lack of progress on inflation. While raising interest rates is unlikely, the Fed is prepared to keep interest rates at current levels until significant progress is made on inflation rates or the labor market shows clear signs of weakness.
Concerns about deflation initially arose due to the high inflation rate in the United States, which proved stronger than expected and showed deflationary tendencies. The US inflation rate has exceeded that of the Eurozone since the beginning of the pandemic.
Although there are differences in economic growth narratives, similarities in inflation can be attributed to shared global shocks and similar domestic supply-side constraints. However, the ECB’s new concerns extend beyond US inflation rates to include the depreciation of the euro and rising oil prices.
How likely is the break-even scenario for EUR/USD?
What will it take to restore parity between the euro and the US dollar? ING believes that further divergence in Fed and ECB policy may be sufficient, but the euro no longer faces the same fundamental pressures that the energy crisis imposed on its fair value in the longer term. It may be necessary to see the two-year EUR/USD swap rate (interest rate differential) widen beyond the low of -175 basis points. To get EUR/USD closer to the 1.00 parity level, markets will have to cancel all of this year’s Fed quantitative easing bets while keeping the ECB’s bets between 75 and 100 basis points. Given the extraordinary strength of US data and the ongoing upward revision in Fed interest rate expectations, this is not out of the question.
The basic view for analysts and markets remains that the Fed will cut interest rates by one point this year as the US consumer story eventually eases and inflation returns to a more stable downward trend. In line with their call for a 75 basis point interest rate cut in 2024, ING predicts that EUR/USD is more likely to trade in the upper half of the “1.05 – 1.10” range rather than the lower half of the “1.00 – 1.05” range.
USD Outlook: US Slowdown Central Markets are currently anticipating little chance of any action at the FOMC meeting and cuts of 16 basis points by September and 35 basis points by December – this was less than 30 basis points before the press conference. Given that just three months ago the market was anticipating a full 150 basis points of interest rate cuts this year, starting with the FOMC meeting in March, this is a notable shift.
