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A 'hawkish' hike at the ECB next week can boost the euro, but until then, a heavy tone is expected by analysts we follow.
The dollar is grinding higher against most peers, pushing the euro-to-dollar conversion lower to 1.1607 by the time of writing Thursday, helped by a run of above-consensus U.S. data releases.
That USD strength can extend into the weekend if Friday's non-farms job report beats expectations, and it won't be until next week that the euro side of the equation comes into play when the European Central Bank delivers a 25bp 'insurance' interest rate hike.
"One week ahead of the ECB meeting, we see increasing risks of a hawkish hike, but lack of progress in the Middle East might take EUR/USD to 1.15 before then," says Francesco Pesole, FX Strategist at ING Bank.
The Thursday ECB decision will be designed to guard against the prospect of Eurozone inflation running too hot in the coming months.
However, with the hike 'in the price' it will fall to the guidance to give the euro a filip; should the ECB signal it stands ready to act again, the euro-dollar could reclaim some recently lost ground.
"Since inflation is likely to remain above the 3% mark for longer, we now expect not only one rate hike at the next ECB meeting on June 11, but also a second one," says Commerzbank in a recent assessment.
The EUR/USD exchange rate has been restricted to a range between 1.15 to 1.18 since February. It's now erring to the lower end of the range amidst strong U.S. data and the uncertainty posed by the Iran-U.S.
EUR/USD Still Favoured Higher Medium-term
Near-term risks to the dollar's strengthening trend are found on two fronts: The stance of the new Federal Reserve Chair Kevin Warsh and a peace deal in the U.S.-Iran conflict.
Warsh will oversee his first Fed meeting mid-month and he will have to balance the need to please his sponsor, Donald Trump, with the Fed's mandate to limit inflation's rise.
Above: Fed rates are stimulatory to growth. Image: Oxford Economics.
A significant risk to the dollar would be Warsh undermining his credibility and that of the central bank he now runs by erring 'dovish' in the face of evidence the Fed might already be dragging its feet on the need to adjust rates higher.
An agreement between the U.S. and Iran is another risk to the dollar as it would allow oil and gas prices to fall, lower inflation expectations and help Warsh strike a 'dovish' tone at upcoming Fed meetings.
That would set euro-dollar on the road higher.
"EUR/USD appreciation might prove slower, but the mid-term outlook is still constructive," says Nick Kennedy, FX Strategist at Lloyds Bank.
