Since the start of the year, the Euro(EUR) has been pretty steady against the dollar. It has, in contrast, gained against the pound. Both of those currencies amount to the vast majority of the Euro’s comparables, so it can be said that the shared currency has been fairly steady over the last six weeks.
This is a somewhat counterintuitive position for the Euro, with the ECB in the midst of a rate cut cycle and the economy seen struggling to pick up. So, it opens the question whether there will be a rebound, or whether this is just a pause in the overall downward trajectory.
Failing to Reach Parity
The widening interest rate gap between the dollar and the Euro(EUR) has prompted rampant speculation that the EURUSD could fall back to parity. After all, that’s what drove it down below that level a couple of years ago. However, it seems to be having considerable trouble overcoming support just above 1.2000.
The thing is, the market has remained pretty solid in its projections for interest rates over the last few weeks. This means that the expected rate gap is likely already priced in. Economists expect the ECB to complete another 75 bps of easing in the first half of the year (or three more rate cuts). Meanwhile, the Fed is expected to ease by just 25 bps, at the very end in June. That means that the gap will widen by 50bps according to the consensus of projections by the middle of the year.
Gaining Momentum
In other words, for the EURUSD to go down further, it presumably would need something to indicate either the Fed will get more hawkish, or the ECB will get more dovish. Besides waiting for the data and then the upcoming rate decisions, there are other areas of the market to look for potential changes in sentiment.
One of those of interest is that European stocks have been hitting new record highs. That typically is a sign that traders are expecting further easing from the central bank. More directly, if investors expect the stock market to do better, then they will move out of bonds and invest in equities. Typically this weighs down on the currency.
Are Tariffs Actually Supporting the Euro(EUR)?
The conventional wisdom is that tariffs make imported goods more costly, which in turn pushes up inflation. That means the currency of the country that applies the tariffs should get stronger, as markets price in higher interest rates. With markets expecting reciprocal and retaliatory tariffs, it’s not exactly clear who will ultimately see the impact of tariffs on their interest rates.
A potential trade war between the US and the EU might leave investors hesitant to move money across the ocean as part of the usual positioning according to interest rates. In other words, the heightened uncertainty about tax policy as a result of the threat of tariff wars could be keeping the Euro from suffering some of the weakness from interest rates that would normally be expected.
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