The EUR/USD pair continues to rise as the US Dollar struggles due to increased speculation of possible Fed rate cuts in 2024. The US ISM Services PMI dropped to 48.8 in June, its sharpest decline since April 2020. This decline has added to the downward pressure on the US Dollar, leading to EUR/USD trading around 1.0790 during the Asian session on Thursday. Additionally, the upcoming second round of the French election on July 7 is expected to bring volatility to the Euro.
The US Dollar Index (DXY), which compares the USD against six other major currencies, is facing challenges amid lower US Treasury yields. The DXY is currently trading around 105.30, with 2-year and 10-year yields on US Treasury bonds at 4.70% and 4.35% respectively. Economic data from the US has also been mixed, with the US ISM Services PMI falling sharply to 48.8 in June, below market expectations. The ADP Employment report showed a lower than expected increase in private payrolls in June.
On the Euro’s side, traders are anticipating increased volatility as the second round of the French election approaches. According to a recent poll, the far-right RN party is projected to fall short of the majority needed to control the National Assembly. This has resulted in a reduction in the risk premium for French government bonds, reflecting growing investor confidence. The yield spread between French and German 10-year government bonds has narrowed to around 71 basis points.
The Euro is the currency used by 20 European Union countries in the Eurozone and is the second most traded currency in the world after the US Dollar. The Euro accounted for 31% of all foreign exchange transactions in 2022, with an average daily turnover of over $2.2 trillion. The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone and is responsible for setting interest rates and managing monetary policy.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), plays a crucial role in determining the Euro’s value. If inflation rises above the ECB’s 2% target, it may lead to an increase in interest rates to control inflation. Economic indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys also impact the Euro’s performance. A strong economy and positive trade balance are beneficial for the Euro.
In conclusion, the EUR/USD pair continues to rise as the US Dollar faces pressure from speculation of Fed rate cuts in 2024. Economic data from the US, including a sharp decline in the ISM Services PMI, has also weighed on the Dollar. The upcoming French election is expected to bring volatility to the Euro, with the far-right RN party projected to fall short of a parliamentary majority. The Eurozone’s economic indicators and trade balance data will continue to influence the performance of the Euro in the coming months.
