Euro About to gain strength in European trade on Wednesday, rising against a basket of major rivals and inching closer to the significant $1.12 mark against the U.S. dollar. This recent uptrend marks a four-week high for the euro and is fueled by shifting expectations regarding interest rates in both Europe and the U.S.

Recent Euro Movements

The EUR/USD pair rose by 0.2% today, reaching $1.1199—the highest level since August 26. During the session, the euro recorded a low of $1.1175. This positive momentum follows a 0.6% increase on Tuesday, which was the first gain in three days and the largest since August 23, largely driven by disappointing U.S. economic data.

European Central Bank (ECB) Remarks

Earlier this week, bullish comments from European Central Bank (ECB) officials have played a pivotal role in strengthening the euro. Madis Müller, a member of the ECB and Governor of the Bank of Estonia, stated on Tuesday that while the decision to cut interest rates in October is still on the table, it is premature to make definitive predictions ahead of the next meeting. He emphasized that it would be easier to reach a decision regarding interest rates at the December meeting.

Interest Rate Expectations

Market analysts are currently anticipating that the ECB will opt for a rate cut of less than 50 basis points by the end of 2024. This outlook stands in contrast to the developments in the U.S., where a series of weak economic indicators and bearish remarks from Federal Reserve officials have boosted the likelihood of a 0.5% interest rate cut in November.

U.S. Economic Data

Recent data from the U.S. indicated a decline in housing prices in July, accompanied by an unexpected drop in consumer confidence for September. These figures have led Chicago Fed President Austin Goolsbey to suggest that there could be “a lot of rate cuts” in the next 12 months, while Minneapolis Fed President Neil Kashkari noted that future interest rate decisions will be contingent on economic data.

Following these remarks, the Fedwatch tool indicated a 60% probability of a 0.5% Fed interest rate cut in November, while the odds for a smaller 0.25% cut decreased to 40%.

Interest Rate Gap

Currently, the interest rate gap between the U.S. and the eurozone stands at 135 basis points in favor of the U.S. This gap is expected to remain stable through October, which may impact future trading dynamics between the euro and the dollar.

Conclusion

As the euro approaches the $1.12 threshold, the interplay of ECB and Federal Reserve interest rate policies is critical for determining its trajectory. With the eurozone potentially holding off on rate cuts and U.S. officials signaling possible easing, traders will be closely monitoring upcoming economic data and central bank communications. The market sentiment around these developments will likely dictate the euro’s movement in the coming days.