Euro Rebounds Amid Hopes on Interest Rate Gap

Euro Rebounds in European markets on Thursday against a basket of global currencies, marking its first increase in three days against the US dollar. This rise comes as the euro holds above its two-week low
driven by buying activity at corrective levels and hopes for a narrowing interest rate gap between Europe and the United States.

Key Factors Influencing the Euro’s Rise

Weak US Economic Data

Recent weak economic data from the United States has heightened the likelihood that the Federal Reserve will fully price in interest rate cuts for both September and November. This has boosted investor sentiment towards the euro.

Price Outlook

  • Today’s Euro Exchange Rate: The euro rose against the dollar by 0.2% to $1.0858
    up from the opening price of $1.0840
    with the lowest level recorded at $1.0828.
  • Wednesday’s Trading: The euro ended Wednesday down by 0.15% against the dollar
    marking the second consecutive daily loss and hitting a two-week low at $1.0826 due to lower-than-expected data from key sectors in Europe.

European Interest Rate

The likelihood of the European Central Bank (ECB) cutting interest rates at the September meeting remains below 50%. Investors are awaiting more data to better understand developments in growth and inflation levels in the euro area.

US Interest Rate

Data showing a surprising contraction in US industrial activity in July has increased the pricing of a 25 basis point cut in US interest rates for September from 94% to 100%
and the likelihood of a cut in November from 98% to 100%.

Interest Rate Gap

The current interest rate gap between Europe and the United States stands at 125 basis points in favor of US interest rates. Given the current expectations regarding European and US interest rates
it is anticipated that this gap will narrow to 100 basis points in September.

Conclusion

The euro’s recent gains reflect market expectations of a narrowing interest rate differential between the eurozone and the US. Weak economic data from the US has increased the likelihood of Federal Reserve rate cuts, providing support for the Euro Rebounds. Investors will continue to monitor upcoming economic data and central bank decisions closely
as these will play a critical role in the future direction of the EUR/USD exchange rate.