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Euro recovers amid rising dollar and geopolitical tensions


eurusd analysis, forex trading

On Wednesday, the euro experienced a recovery from its five-month low, making gains against the U.S. dollar, which had recently surged due to ongoing geopolitical tensions and shifts in the policy communications from the Federal Reserve. Previously, market expectations were set on lower interest rates, but the current sentiment anticipates U.S. rates remaining elevated for a longer duration than initially thought. This change is stark compared to the situation in the eurozone, where different economic dynamics are at play, indicating a distinct set of challenges and policies.


Federal Reserve Chair, Jerome Powell, along with other key officials from the U.S. central bank, has shifted away from their previous suggestions that interest rate cuts might be on the horizon. Instead, they have emphasized the necessity to maintain a tight monetary policy for an extended period. This represents a significant pivot in the Fed's strategy, influenced by emerging data that shows the U.S. economy is progressing differently from earlier Federal Reserve predictions. This revelation has prompted investors to recalibrate their expectations for near-term rate reductions.



Amidst these domestic policy adjustments, the international scene, particularly the Middle East, is experiencing heightened tensions, notably between Iran and Israel. These developments have bolstered the allure of the U.S. dollar as a safe-haven asset, drawing investors towards it in times of uncertainty. The robust position of the dollar is seen as a protective measure against the backdrop of global instability.


Market analysts, such as Jane Foley from Rabobank, express a continued bullish outlook on the U.S. dollar, foreseeing further strength in light of escalating geopolitical instability. This optimism is reflected in the broader financial community, where there is a consensus that the dollar will maintain its strong position due to the ongoing international conflicts and uncertainties.



Bank of America has reacted to these shifts by revising their forecasts for when the Fed might start easing its monetary policy. Initially expected in June, the forecast now extends the timeline to December or even later. This adjustment reflects a growing realization among economists and analysts that the U.S. economy may require a longer period of elevated rates to stabilize before any loosening of monetary policy can be considered safe.


Olivier Korber from SG Markets has pointed out that the market is anticipating nearly two rate cuts from the Fed this year. However, he also suggests that the Fed might adjust its policy trajectory more hawkishly in the upcoming weeks. Such a shift could potentially lower the EUR/USD exchange rate to below 1.05, a move that would reflect stronger confidence in the U.S. economic handling amid global uncertainties.


As we look to 2024, the forecast for rate cuts has been significantly scaled back. At the beginning of the year, the market expected about 160 basis points of cuts; this projection has now been revised down to only 40 basis points. This major revision indicates a shift in investor sentiment and expectations, acknowledging the challenges and slower pace of recovery that might be anticipated in the U.S. economy.



In Europe, meanwhile, policymakers at the European Central Bank are gearing up for a potential rate cut in June with the aim of driving inflation back to their 2% target by next year. However, the trajectory to this inflation target is fraught with uncertainty and potential economic hurdles. The ECB faces a delicate balancing act, navigating through an intricate economic landscape that could impact their policy effectiveness.


Analysts from ING highlight that the risks to their foreign exchange (FX) forecasts are influenced not only by the decisions from the Fed and the ECB but also by external geopolitical factors. The euro is particularly vulnerable to developments in the Middle East and Ukraine. The disparity in energy independence between the eurozone and the U.S. could also play a crucial role, as higher oil prices could exert upward pressure on the dollar against the euro. Moreover, any major disturbances in global stock markets would likely have a pronounced effect on currency values, similar to the dynamics previously discussed. Additionally, ING analysts speculate that a potential re-election of Donald Trump in November could significantly benefit the dollar while adversely affecting the euro.



Currently, the EUR/USD exchange rate stands at 1.0670. According to the options market, there's an 18% chance that the pair will drop to 1.00 within the next six months. In contrast, the likelihood of it rising to 1.10 is estimated at 53%. These probabilities reflect the market's assessment of future movements in the exchange rate, incorporating both economic fundamentals and speculative elements.


eurusd analysis, forex trading
EUR/USD daily chart, MetaTrader, 17.04.2024

17.04.2024



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