Euro-Dollar Buyers In "A Good Place"
- Written by: Gary Howes
Above: ECB President Christine Lagarde at the Governing Council press conference, Frankfurt am Main. Also shown, Vice President Luis De Guindos and Head of Communications at the ECB Wolfgang Proissl. Image copyright: ECB.
Strategists say the path to further gains in the euro to dollar conversion (EUR/USD) is intact.
Following this week's key developments in the U.S. and Europe, foreign exchange strategists are confident EUR/USD can continue to deliver.
Although the European Central Bank (ECB) did what was expected of it by keeping interest rates unchanged, the euro found additional support from the central bank's latest communications which indicated further cuts are off the table.
Sure, there were some growth upgrades to latch onto, but it was the helpful commentary from President Christine Lagarde that proved the highlight of the day, telling the press that "we continue to be in a good place" on inflation and growth.
This does not strike the right chords for those looking for caution that would be fundamental in any attempts to groom the market for additional rate cuts.
"The euro spiked on the back of President Lagarde's hawkish remarks," says Francesco Pesole, FX Strategist at ING Bank N.V. "Our baseline view remains aligned with market expectations: the ECB is done cutting rates."
The ECB said the balance of risks for growth is now seen as "more balanced", confirming less apprehension about U.S. tariffs, and Lagarde was clear that she believed the disinflation process in the eurozone was now over.
This means that there is little reason to pursue lower rates at this juncture.
Growth forecasts for 2025 were upgraded to 1.2% from 0.9%, while the inflation forecasts showed inflation effectively sticking to the 2.0% target over the next three years.
Foreign exchange strategists at Bank of America target ongoing EUR/USD strength on the basis of limited ECB cuts.
Strategists at the Wall Street bank on Friday reiterate their 'long' trade, which was initiated in August.
"We see scope for the USD to remain on a depreciation trend through the end of the year, and recommend going long EUR/USD at current levels (spot ref: 1.1612). We target 1.20 by year end," say strategists.
The U.S. Dollar is poised for further weakness as the Federal Reserve bank cuts interest rates next week, and is likely to follow suit with further reductions.
Consensus in expecting a 25bp cut with additional moves in October and December.
The firming in rate cut bets was helped by Thursday's on-target inflation print that showed 0.3% growth month-on-month in core inflation, while headline CPI rose by 2.9% year-on-year (+0.4% m/m).
"Bigger picture, we stay bearish USD, expecting it to resume its downward trend over the rest of 2025. While Fed rate cuts are well priced in, the risk of lower real rates and higher inflation breakevens is likely not," says a note from Bank of America, released Friday. "A dovish policy pivot amid sticky inflation and Fed independence concerns could be amplified by the recovery in China sentiment and renewed USD hedging activity."
The clear-cut divergence in Eurozone and U.S. interest rates provides a solid fundamental narrative for ongoing EUR/USD support.
